Getting and spending; an introduction to economics

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GETTING AND SPENDING

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GETTING AND SPENDING

AN INTRODUCTION TO ECONOMICS

BY

LETTICE FISHER

(MRS. H. A. L. FISHER)
SOMERVILLE COLLEGE, OXFORD

With an Introduction by Sir William Ashley

LONDON : 48 PALL MALL

W. COLLINS SONS & CO. LTD.

GLASGOW MELBOURNE AUCKLAND

Qm^ GBEAT BBlMlf

Copyright

First Impression, April, 1922
Second „ June, 1922

7 5

Manufactured in Great Britain

INTRODUCTION

Mrs Fisher has written a book on elementary
Economics which those who come to it with open
minds and with a willingness to think over what she
says will find both interesting and enlightening. To
have produced so animated and yet so judicious a Uttle
volume is something of an achievement : it could be
accompHshed only by one who has learnt as a teacher
to enter into the minds of others and who possesses
the gift of lucid expression.

The writer of this book stands in the line of spiritual
succession to the creators of English Political Economy
— ^to Adam Smith and Ricardo and John Stuart Mill.
Her readers wiU observe with what respect she refers
to these masters; and, if they should continue their
^economic studies, they wiU find that the fundamental
assumptions of the founders of systematic economic
teaching are hers also. I must confess that there have
been very many earUer books, which essayed the same
task in a similar spirit, which I should have hesitated
to commend. Enghsh Political Economy, when it
first presented itself to the world as an ordered body
of thought, combined, with much that was true and
of permanent value, much that was so one-sided as to be
misleading and no Uttle that was simply erroneous.
AppUed, with the best intentions but with imperfect
understanding of human nature, as the adequate
explanation and even, in a sense, as the justification, of

5

6 INTRODUCTION

the grave social evils of the time it deservedly aroused
the fierce antagonism of many of the more intelligent
of the working people; and it may be doubted whether,
for half a century, it did not do more harm than good.
But since Mill's time there has been much fresh thinking
among economists and wider horizons have opened
to them; and in this treatise of Mrs Fisher it is the
more permanently valuable parts of the old teaching
which survive, quaUfied and safeguarded by many of
the results of later observation. The author has
strong and definite opinions; but the temper of
her book is generous and fair minded. She will
be very well satisfied, I am sure, if her book sets her
readers thinking and makes them realise the strength
of the forces she shows to be at work, even if they do
not on all points reach the same final conclusions.
There may be legitimate divergences of opinion
as to the relative magnitude of conflicting consider-
ations. But, in the main, the considerations which
Mrs Fisher sets forth — and sets forth with so much
spirit — are such as all economists agree to be important;
and the general line of reasoning and exposition which
she foUows with so firm a tread wUl be found, by most
people, the most convenient path of approach to any
further examination of the insistent problems of
industrial society.

William Ashley,

AUTHOR'S PREFACE

I have tried to keep this little book as simple, easy, and
elementary as possible. It is primarily intended for
schools, but I hope it may also be useful to older
students. There are numbers of excellent text-books
for advanced students, but in my own teaching years
I constantly longed for something really easy which
I coidd recommend to my pupils as an introduction
to their subject. Study Circles, Citizens' Associations,
and similar bodies may also perhaps make use of a
book which does not profess to be anything but the
simplest of outlines. With such needs in view I have
added a bibUography. This is purposely very short,
introductory rather than comprehensive, but I hope
it may be useful to older students and perhaps to the
teachers of the younger.

I am only too fully conscious of aU that I have
left out, of the many aspects of the industrial problem
upon which I have not even touched. But if students
grasp the elementary outlines, the fundamentals, of
the subject, with which alone I have tried to deal,
they should be able to understand and work out for
themselves the advanced and difficult problems which
are of such absorbing interest to aU thoughtful citizens.

CONTENTS

I.— INTRODUCTION

PAGB

Economics : what does the word mean and why is the
subject worth studying? We mean by Economics the
study of man in the ordinary business of Ufe, earning
his Uving and spending his income — ^The study of
economic science helps us to understand the machinery
of daily hfe and is part of our training for citizenship 13

Some Explanations : Wealth and Value — Importance
of exact definitions — What is Wealth ? and what do we
mean by Value — ^The free movement of people and
things — Both people and things can now move freely,
but have not always done so, and cannot do so every-
where 20

II.— PRODUCTION

How wealth comes into being : (i) Nature's forces;
(2) Man's work — Causes of the efficiency of man's work :
his body, his mind, his character, the laws under which
he Uves. (3) The planning and arrangement of work,
combination of workers, division of labour 28

Capital : what is it, how does it come into existence,
and what does it do ? — ^The destruction of capital : by
war, by Nature's forces — Capital must be consumed,
that is, used — Saving and hoarding — ^The effect of
spending upon capital — Spending does not make work
but does decide what kind of work shall be done 45

If aU the productive forces were as efficient as possible 61

III.— DISTRIBUTION

How wealth is divided — Four sources of income — Rent,
Interest, Wages or Salaries, and Profits of management 66
Rent : What is it, and why does it exist ? — Origin of

9

10 CONTENTS

PAGB

rent — The theory of rent : some illustrations — ^The
law of diminishing returns — Function of landowners
and of rent 7°

Interest : What is it and why is it paid ? — ^The demand
for capital which can be lent — ^The supply of capital —
The rate of interest — High and low rates of interest 84

Wages : Payment for work — Theories of wages — ^The
wage fund theory, the work fund theory, the product
theory — The modem view : demand and supply —
Demand for labour — Demand and efficiency — Supply
of labour, the standard of comfort — ^Women's wages 92

Profits : Definition — What determines the rate of
profits? What are they and how do they arise? 115

Experiments in distribution — Profit sharing — Co-
operation — ^Trade Unions — Socialism 122

Summary 13°

IV.— EXCHANGE

Value and Price : Causes of Value — Influences affecting
the supply of commodities — Commodities of which the
supply is limited — Commodities of whidh the
supply can be increased at an increased cost — Com-
modities of which the supply can be increased at a
diminished cost — Commodities of which the supply can
be increased at the same cost — Monopolies, natural and
artificial — Influences affecting the demand for com-
modities — Elastic and inelastic demand — Market price
and normal price 134

International Trade : What it is and why it happens
— Why do we import things from abroad? — Because
we carmot produce them, because we can only produce
them with di£5culty, because it pays us better to
produce something else — How does it work? — Imports
and exports — BUls of exchange — ^Free Trade and
Protection 146

Money : What is it ? — ^The qualities of a good money
— Standard and Token money — What determines the
value of money, that is, the level of prices? — Supply
of gold — ^Demand for gold — Inconvertible paper money
— Gresham's Law — Effects of changes in prices 162

CONTENTS II

PASS

Banking and credit — Bank-notes and cheques — Credit
— Banks organise credit — Modem banking — ^The Bank
of England 176

v.— APPLIED ECONOMICS

Public Finance — Rates and Taxes — Why are they
paid ? — How can the economist help ? — How should the
taxes be levied? — ^The qualities of a good tax — Direct
and indirect taxation — The Income Tax — Death Duties
— ^The National Debt — Rates — Incidence of taxation 187

INTRODUCTION

ECONOMICS

WHAT DOES THE WORD MEAN, AND WHY IS THE
SUBJECT WORTH STUDYING?

Human beings are so many-sided that we have to
think about them in different ways. Thus, for
instance, there is all the mass of wisdom gathered
together by generations of learned men and women
about our bodies and minds, a number of different
sciences as we call them, from the Latin word meaning
knowledge. Then there are other sciences which deal
with men not as individuals but as members of what
we call organised society, that is groups of people
living together under more or less settled conditions.
Economic science is one of these.

Scientific students try to work out the relation
between cause and effect, to discover why things
happen in certain ways, and what results certain
actions are likely to have. Their object is to discover
the truth, they leave it to others to apply the know-
ledge they obtain. For example, the doctor uses the
sciences which deal with our bodies when he tells us
how to keep well, or what to do if we are so unlucky
as to fall ill. The scientific thinker has provided the
knowledge, the doctor puts it into practice. Of

13

14 GETTING AND SPENDING

course, many doctors are themselves working at new
discoveries which will help them and those who come
after them. But when the doctor is thinking out his
problems, his one aim is to discover the truth, when
he is looking after his patients he is applpng his
knowledge.

The name economics comes from a Greek word
meaning the care of the household, and we might
describe Economics as the science of everyday life.
Economists think about men in modem civUised
conditions, that is, they think about people who
travel in trains and steamships, and nowadays in
airships too, who use telephones and telegraphs, live
under settled laws, read the newspapers if they want
to, know something of what is going on in the world,
and are able to decide for themselves where they wiU
live and how they wiU earn their hving. The economist
is interested in the business side of people, in their
ordinary everyday Hves, how they earn their money,
and how they spend it, how they save, and what they
buy. Of course, the business side is in real life more or
less mixed up with all the other sides. For instance,
how much we earn rather depends on what we want.
A young man may want to marry and to provide for
any children he may have, in which case he will
probably be anxious to get regular work under healthy
conditions. Or perhaps he longs to travel, in which
case he may become a sailor or join the army. Or
perhaps he thinks he is not hkely to marry, and only
cares to earn just enough to keep himself and to have
something over with which he can go to the pictures,
or to a football match on Saturdays.

The economist does not try to work out all this

ECONOMICS 15

side of life, he leaves it to others. He takes certain
things for granted. He assumes that people are willing
to work, but that as a general rule they expect to be
paid for their work. Or, if they are working for
themselves, they hope to produce something pleasant
to possess or to give to friends, such as peas and
potatoes from their own gardens and allotments, or
perhaps pretty clothes. Again, the economist takes
it for granted that people who have things to sell
will try to get as good a price as they can, while people
who want to buy wiU try to get what they want as
cheaply as possible.

Of course, there are exceptions to all these rules, but
broadly speaking they are true of ordinary human
beings engaged in ordinary business. Thus, a mother
making clothes for her baby may not try to get the
quickest results with the very least amount of work.
But a dressmaker, working for her customers, will
feel differently, her object is to earn her living, and
although she probably enjoys sewing, she does it for
business reasons and not mainly for pleasure. On
the whole, any conclusions at which we may arrive,
reasoning on these assumptions, are likely to be true
(if we reason correctly) in so far as we have to
do with ordinary bu5dng and selhng and ordinary
business affairs.

The economist then is concerned with prices and
earnings, with trade, with how we get our food and
clothes and furniture, and how they are paid for.
He helps us to understand aU sorts of things; for
example, how it is that we in England can eat bread
made in part from wheat grown in Argentina or
Canada, butter from Denmark or Ireland, bananas

i6 GETTING AND SPENDING

from the Canaries or the West Indies, tea from India
or China; wear clothes made of cotton from Eg37pt
or America, or wool which once grew upon the backs
of Australian sheep. He explains to us how and why
we obtain all these things. It probably seems to us
so easy and natural that not until we begin to think
about it do we realise how compUcated it aU is, and
what a number of people must be doing all sorts of
things before we CEin go to the grocer and buy our
tea and sugar, or to the green-grocer for our fruit, or
to the other shops for our clothes and oior sheets and
towels and blankets.

There are people growing the com, and people making
ploughs and tractors and reapers and threshing
machines, with the help of which the farmers can
grow and harvest the com. And there is another
set of people getting the coal and iron and forging the
steel to make these machines. And yet other sets
of people are busy moving the com from Argentina
and Canada to Great Britain, people on railways, and
people in ships, and people working at the docks.
Others, again, wiU be making the railway engines and
trucks and the steel raUs and the boilers and all the
different parts of the ships and trtiins, and further
back still wiU be the workmen who got the coal and
made the steel and other materials out of which the
ships and trains were built up.

Then there are the bankers who help to arrange
about the payment for aU these goods and services,
the payments made by the farmers to their men, and
for their ploughs and machines, the payments made
by the people who buy the corn and move it in the
trains and ships, and the people who take it to the

ECONOMICS 17

mills to be ground into flour, and finally the bakers
who make it into bread. And meanwhile all this
immense number of people and their helpers have
themselves to be fed and clothed and housed and
amused and kept warm and doctored and cared for in
a hundred different ways.

A good many grown up people, and indeed many of
the children, began to reaUse something of all this
in the days of the Great War, when sugar ran very
short, partly because the European countries from
which we had been accustomed to buy some of it
were too busy fighting to grow much sugar-beet,
and partly because the ships which brought it to us
were apt to be sunk by submarines. We learnt a
good deal too in those days and in the years just after
the Armistice about prices, and why sometimes our
money wiU buy a fair amount, and sometimes seems
to go no way at aU.

But in ordinary Ufe, when there are no wars to
upset us, we are apt to take it all for granted, and
think, Uttle, if at all, about why prices are high or
low, or how we come to be fed and clothed and warmed.
It would, however, be far better to understand about
these things. For they are all quite important, and
sooner or later are hkely to be discussed in town and
county councils, or in Parliament, and laws may be
made which wiU deal with trade or with the conditions
of Ufe in certain industries, and with all sorts of
matters which a knowledge of economics would help
us to understand. And, as we shall have votes when
we are grown up, it is very desirable that we should
know something about such matters. The laws
which are made in Parliament concern us aU, and we

G.S. B

i8 GETTING AND SPENDING

have ourselves to thank if we get laws that we do not
hke. Members of Parliament, or indeed for the
matter of that Governments, can really only carry
out what they beUeve to be the wishes of the people
who have votes, and the more sensible and thoughtful
and capable of forming sound opinions the voters
are, the better laws and Governments shall we
have.

Therefore, as each one of us is bound to be con-
cerned with trade or commerce, salaries and savings,
taxes and rates, opportunities of earning our livings,
sooner or later, in one way or another, it is surely
very desirable that we should have some knowledge
of these things, and have it in a scientific way.
Economic science will not teU us that certain things
are right or wrong, but what it will do, if we study
it carefully, is to help us to understand something of
why and how they happen, and what results are Ukely
to follow from various courses of action, as, for example,
the passing of laws which affect trade and industry.

If we aU learn something of the principles of health,
and of what habits are likely to keep our bodies in
good condition, we shall become a healthier and
stronger race. In the same way, if we all learn some-
thing about the business side of life, we are much less
Ukely to make mistakes in government, or to pass
bad laws, or to come to unfortunate decisions as to
business or industry or trade. Thus we shall be more
Ukely to be a fairly prosperous race, even more likely
to be a happy one, in so far as happiness depends upon
Uving under good conditions, and having in all parts
of the country and in aU walks of life enough to
satisfy our needs and desires.

ECONOMICS 19

To sum up then : Economics is the study of man-
kind living under modem civilised conditions, carrying
on the ordinary business of life. And the reason
why economics is worth studying is partly because it
should be one bit of our training for citizenship, and
partly because it makes all the ordinary affairs of
life, engineering or housekeeping, working in a mill
or an o£&ce, making clothes or machines, helping to
nm trains or motors or ships, growing com or roots,
or stock-breeding, so infinitely more interesting if we
know a little about all the intricate and wonderful
organisation of which each small transaction is a part.
Moreover, the more we get used to thinking in a
scientific manner, the less Ukely we are to be led away
by wrong ideas of any kind, or by foohsh notions, and
the more able shall we be to form really sensible
opinions which are worth having. So, if we study
economics in a scientific way it should help us to be
good citizens, to be interested in the work of our
daily lives, and to be sensible, reasonable human
beings.

SOME EXPLANATIONS

WEALTH AND VALUE

As girls or boys who have studied physics or botany
or chemistry will know, most sciences have a special
set of words of their own, which are often tiresome
to learn or to remember, though they are very con-
venient when once they are firmly fixed in our heads,
and a great help to clear thinking. But one of the
difficulties of economists is that they use words which
are also used in ordinary Ufe, and very often use them
in a way unlike that of ordinary Hfe, and give them a
special meaning. So that one of the first things we
have to do, in our study of economics, is to be careful
that we understand the exact meaning of the words
used.

A great many mistakes have been made for want
of this precaution, and people have wasted any amount
of energy in attacking what they behaved to be the
teaching of economists, when really the poor economists
were quite innocent, and meant something entirely
different. That is the dif&culty of a study which has
to do with the affairs of everyday hfe, but it is not
a very serious dif&culty, and it can be got over by
making quite sure of our definitions as we go along.

One of the words which we use a great deal is
Wealth. Indeed one of the definitions of Economics
is that it is the science of Man in relation to Wealth.

SOME EXPLANATIONS 21

Now what do economists mean by Wealth? The
word suggests to most of us great houses, powerful
motor-cars, rich fur coats, and jewels. But economists
do not mean only those things. They mean, putting
it broadly, anything which can be bought or sold or
exchanged for something else. Thus marbles are
wealth, if a small boy can exchange them for a pencil
or top or something else which cannot be had for
nothing. And vegetables from our gardens are wealth
because we can take them to market and sell them for
money with which we can buy something else. Prim-
roses in country lanes or hedgerows on the other hand,
are not wealth, because they can be had by any one
who will take the trouble to go and pick them.

But may they not be turned into wealth ? Suppose
they are picked and carried, fresh and delicious, to some
one, perhaps a town dweller or an invalid, who is
willing to give something in exchange for them?
If a country child gathers primroses and trudges a
few miles into the town, sells them, so that he can
buy chocolate or anything else he wants with what
he gets for them, are not the primroses wealth ? They
are clearly not wealth in the country, where any one
can have as many as he likes, if he chooses to take
the trouble to gather them. But the child, by moving
the primroses to the town where they cannot be had
for nothing, has turned them into wealth. He may
come home with a little new wealth of his own, pencils
or sweets perhaps from the town shops, which he has
earned partly by his enterprise in gathering the
primroses, and taking them to some one who wants
them, partly by his energy and the labour of picking
them and carrying them along. He has used Nature's

22 GETTING AND SPENDING

gifts, his own brain and strength, and the result has
been wealth.

It is quite easy to think of things which are some-
times wealth and sometimes not wealth. For
instance, thousands of years ago people used pohshed
flints as knives or spear heads. A specially well
chipped and pohshed flint must have been very much
cherished by its possessor. Later on men began to use
iron and steel weapons, and the old flints lay where they
had been thrown, on rubbish heaps and about in the
fields. They were no longer wealth. Hundreds of
years passed, and we began to be interested in the
doings of the long-ago flint-using people. Collectors
of curiosities began to seek for these flints and to be
willing to give something in exchange for them.
Nowadays if any one with sharp eyes discovers a good
flint implement out on the downs or in the fields, he
might well think of it as wealth.

Sunshine and fresh air are not wealth in the econo-
mist's sense, though they are perhaps the most
precious things in any other sense. But nature gives
them to us freely, and the free gifts of nature are not
economic wealth. People who live in smoky towns
are ready to pay railways or charabancs to carry them
to places where they can bask in the sunshine or
breathe the fresh air, but though the railways and
charabancs are wealth, the sun and air are not, because
any one who chooses to go where they exist can enjoy
them for nothing.

The economic student will be thinking of wealth
in many different ways. He will be thinking about
its production, about the way in which it is divided
among different sets of people, about how and why

SOME EXPLANATIONS 23

different sorts of wealth are exchanged, how some
kinds last a long while, such as houses, while other
kinds, such as food, are used up very quickly. But
whenever he uses the word Wealth he means some-
thing which can be exchanged for something else.

Another of the words which the economist uses in
rather a special way is Value. Later on we shall think
about why some things are more valuable than others,
but before we go any further we had better make it
clear that Value means Power-in-Exchange. That
is, anything which has value can be exchanged for
something else. So that another definition of Wealth
might be That which has Value. Or one might put it
the other way round, and say that everything which
has value, that is, everything for which something
else will be given in exchange, is wealth. The polished
flints had value to the Cave-men, and they have value
now to the collector, but for hundreds of years when
they were neither used nor collected they had no value.

In ordinary hfe we use the word loosely, often
meaning that we hke a thing when we say that we
value it. But if an economist uses the word, he means
by it the power of exchange. So that here we have two
words. Wealth and Value, which have special definite
meanings to the economist, and are used in a variety
of ways in ordinary Hfe, and we must be careful to
remember the economic meaning when we are talking
about economic questions.

THE FREE MOVEMENT OF PEOPLE AND THINGS.

We have already said that the economist is thinking
about people who hve under modem conditions, in a

24 GETTING AND SPENDING

world full of trains and every sort of motor vehicle,
people able to write letters and send telegrams and
have conversations on the telephone. In a word,
the modern world is one in which people can move
about with great freedom and ease. Now although
this is one of the things that we take for granted, and
that seems to us quite natural, it is reaUy rather a
new state of affairs.

In old days, and not so very long ago, movement
was much more difficult. For one thing, there were
not many ways of moving oneself before the discovery
of steam. People could ride, walk, or drive, but
even the quickest stage-coach took a great deal
longer than a motor or a train, while the sea voyages
which now take days lasted for months. And then
people were much less wilhng to move about, partly
because it was a long, difficult, and tiresome business,
and partly because it meant that they would be very
much cut off from the friends and relations they left
behind. If people took a long time to travel, so did
letters, and as for telegrams and telephones, they of
course have only come into use in recent days.

So that when the early economic writers took it
for granted that people could move about freely
wherever they wished, they were really rather
ahead of their times. But we surely may take it
for granted, because travel is so quick and so easy
now that people do move a great deal. And
also there are no laws, and very few, if any,
customs which prevent such movement within a
country, while in the old days, as the historians tell
us, people were in all sorts of ways bound to remain
in their villages or their original homes, or at least

SOME EXPLANATIONS 25

had a good many dif&ciilties to overcome before they
could leave them.

Even in the face of aU these difficulties, however,
people still did move. If it was thought that there
was a good deal of money to be earned in some par-
ticular place, somehow or other people flocked to that
place. A well-known example, though not a very
ancient one, is the movement that took place in
England in the early days of the nineteenth century,
when the discovery of steam led to such tremendous
changes in the methods of work. From all over the
country people came into Lancashire and Yorkshire,
and the big industrial towns which we now know
so well began to grow up.

Nowadays newspapers as well as letters from friends
give us accounts of places where the chances of work
are good, and it does not take long for people to get
to them. We all remember how in the days of the
war people came crowding into the munition areas
to help make shells for the soldiers at the front. In
the most surprisingly short time the great shell shops
were filled with workers.

So that on the whole we may agree that the
economist is right to take it for granted that people
can move about freely, and that, as a general rule,
they do. There are, of course, always exceptions.
People become attached to their homes and do not
wish to leave them, however attractive the chances
offered them in some other place may sound. And
the expense of moving is a thing that has to
be considered. But at any time there are plenty
of young men, not yet married, who have only
themselves and not a quantity of furniture to move,

26 GETTING AND SPENDING

and if the prospects are specially good in some par-
ticular place, and specially attractive, we may be
sure that a number of these young men will find their
way to that place. It is not quite the same with young
women, because, for one thing, it is more difficult for
them than for their brothers to find suitable lodgings,
but on the whole they move about very easily too.

Moreover, people are not bound by custom or law
to any place or calling, as they are to this day bound
by the caste system in India, or as they were by the
laws of the Middle Ages in England. In India, if you
are born a sweeper, a sweeper you remain all your
life. In modern England, it does not matter what
or who your father is, there is no law and no custom
which can prevent a boy or young man from choosing
any career he wishes. For a woman things are not
quite so easy, for though all legal restrictions have
been swept away there are still some customs and a
good many prejudices which tend to keep women
out of certain occupations. It is no doubt
easier for some fortunate people to succeed
than for others, but we have only to think
of the history of many of our most famous men
to-day to reaUse that not only can one move freely
from place to place, but that every year the young
men and women entering life can, and to a great extent
do, move freely into those occupations which seem to
them most attractive. Prime ministers, great generals,
leading statesmen, great captains of industry, may, and
do, come from humble homes, or from families which
have not produced any such distinguished person before.

And if people move about freely, so do things. The
knives made in Sheffield are used aU over the world.

SOME EXPLANATIONS 2;

so are cotton goods from Lancashire, agricultural
machinery from Lincolnshire, boots from Norwich or
Northampton, hosiery from Nottingham, wooUens
from the West Riding of Yorkshire, brasswork from
Birmingham, motors or bicycles from Coventry.
There is nothing to prevent goods from being moved
all over the country. As we shall see later, when we
come to think about trade between people living in
different countries, there are sometimes laws which
make it dif&cult to move things between countries,
or indeed for some people to enter easily countries
not their own. But within any modern civihsed
country people and things move with ease and
freedom. People can find out by means of news-
papers, and trade journals, by telephone calls and
telegrams, where to send things, or where to go them-
selves, and there is every sort of conveyance to take
them wherever they wish.

Finally, our modem banking system helps us to
pay for these things. If we live in Devonshire and
want a set of stainless steel knives from Sheffield,
our banks wiU make all the arrangements by which
we can pay for them, or if we are near enough to a
town to buy them from the local ironmongers, by which
the ironmongers can pay the Shefiield makers. Banks
also make buying and selling easy in many other
ways which we shall discuss later on. So that
when we are thinking of such questions as
Wages, or Prices, or Profits, or Interest, we may
with great safety take it for granted that both
people and things can move all over a country
freely and easily, to any place where they are wanted,
or to which they wish to go.

PRODUCTION

HOW WEALTH COMES INTO BEING

I. — nature's forces

If we are to study man in relation to wealth, the
first thing to do is to consider how wealth comes into
existence. Looking back, whatever else we may think
about the hves of our remote ancestors the cave-men,
it is clear that they did not possess much wealth.
From the economic point of view, perhaps we may
think of their stone weapons and the skins which
served them for clothing as wealth, but that is about
all we can find. In a later stage of civiUsation, made
famihar to us by the Old Testament stories, we have
wealth mostly consisting of flocks and herds. People
wandered about, Hving perhaps in tents, seeking fresh
pastures for the animals which suppUed them with
milk and flesh and skins, and which, therefore, enabled
them to live.

Or we can think of man when he first began to
settle in one place, tried to cultivate the soil,
and grow food for himself. In this stage his
wealth would consist of his crops, the rough
tools he used in his work, his hut, his Uve-stock,
the clothes and rugs he and his family had
spun and woven, the rough pots they had made. As

28

HOW WEALTH COMES INTO BEING 29

time goes on, we find wealth of more and more different
kinds. We can think of descriptions of Eastern
wealth in the Bible, or in the Arabian Nights, and the
history books tell us how here in the Western world
we gradually learnt to increase our wealth in many
different ways. But whether we are thinking of
cave-men, or of the world in which we live to-day,
wealth always comes into being because man uses
his brain and his hands, and works upon the free gifts
of Nature.

Nature gives us water and the power of growth,
and fire and different clays and minerals and many
sorts of plants, and animals which we have tamed
as well as the wild animals whose skins we use to keep
out the cold. And with fire and water we have made
steam, and since the discovery of steam we have
learnt to use another of nature's gifts, electricity, to
do work which otherwise would have had to be done
by sheer muscle and energy and exhausting labour.
More and more, as the centuries have passed, has
man's brain shown him how to use nature's forces
instead of his own to perform the heavy laborious
work of the world.

The great blocks of stone which in the days when
the Pyramids were built must have been moved by
hundreds of sweating, toiling, exhausted men, are
now swung into the air, raised hundreds of feet, and
placed in exactly the right position by a steam crane,
managed with scarcely any effort by one man. Steam
and oU and electricity, nature's gifts, are harnessed
by man to move himself and his goods all over the
world, to weave and to spin, to cut great billets of steel
as if they were butter, to light and warm his buildings,

30 GETTING AND SPENDING

to do all sorts of things which without their help
either could not be done at all, or could only be done
by using a very great deal of human energy. Nature
offers her gifts freely, but it is man's skill of brain
and hand which turns them into wealth for man's use.

Economists are accustomed to think of one of
Nature's gifts, land, as a Uttle different from the rest.
They tell us that it is limited in quantity, which is
obvious, and variable in quaUty, as every farmer or
gardener knows. Moreover, most of it in old countries
belongs to some one, or to some body of people. Only
in the new and imdeveloped countries is land still
to be had for the taking. But whether we think of
land or of any other of nature's gifts, we realise that
all wealth comes into existence through the com-
bination of man's forces with nature's powers. The
factors of production then, as the economist tells us, are
man's forces and nature's gifts.

We know that some countries are richer than others,
and it is interesting to try to find out why. One
fairly obvious reason is that Nature has been a good
deal more generous to some of us than she has to
others. Countries vary very much in climate. Some
suffer from torrid heat, which parches up vegetation
and exhausts man and beast, some from terrible
droughts, which lead to the death of thousands of
animals, some are wrecked by earthquakes, some
frozen by months of bitter cold. In some the soil
is naturally of great fertility, though we realise more
and more that, at all events in old countries, the
fertility of the soil depends at least as much upon
how it is treated by man as upon how it is helped by
Nature.

HOW WEALTH COMES INTO BEING 31

Some countries, such as our own, owe a great part
of their wealth to the rich deposits of coal beneath
the surface of their soil, others to the existence of
gold or precious stones, while it may well be that in
the future those countries which have abundant
water power and can therefore make electricity cheaply
and easily will be among the richest. The rivers that
run down from the Alps into Northern Italy, the huge
waterfalls of Niagara or of the Zambesi, are capable
of being sources of immense wealth to mankind.
Abundant water supplies, a temperate climate, coal
or oil or other mineral deposits, are all pleasant
possessions for any country, and likely to increase the
wealth of its inhabitants.

II. — MAN S WORK

Suppose that we were continuing our inquiry into
why some countries are so much wealthier than others,
and had reckoned up what Natiure had done for them,
we should probably go on to inquire what sort of
people lived in them. What of their population?
Is it healthy and intelligent and industrious, or
diseased, stupid, idle, vicious, ready rather to get
along anyhow than to make efforts and to improve
things? However generous Nature may be with her
gifts, no country wiU be wealthy unless its people
are efficient, while an intelligent and hard-working
population may bring great prosperity to a country
for which Nature has done but little.

There are always some people in every country
who are eating food and wearing clothes and Uving

32 GETTING AND SPENDING

in houses and using furniture, and in many ways
doing what economists call consuming wealth, but
who are not doing anything to help produce wealth.
There are also a good many more who are helping,
but who do not produce as much as they consume.

This is not at all the same thing as saying
that there are numbers of people who are not
being paid for their work. Some of the work
which is not paid for is often the most useful
to the community. No one pays mothers, for
example, and yet the world would soon come to
an end if they did not spend much of the day and
often a good part of the night as well, in working for
their children. And in every country, perhaps especi-
ally in our own, there is an immense amount of work
done which is not paid for, but which is of great
importance, and without which the community would
be certainly poorer. For instance, there is all the
work done by magistrates, or by members of town
councils and other local bodies, and by all sorts of
people in all sorts of ways. It is quite possible that
some of the people who work hardest, and who are
not paid for a great deal of what they do, are among
the most useful.

But what we do find is that there are also everywhere
some people of whom it would be true to say that
the country would be richer if they were no longer
in it. There are the people who do not hke work,
whether with their brains or with their bodies, and
who manage to get along without doing any, or at
all events with remarkably little. And there are
those who cannot work because they are ill in body
or in mind. Most of these last we may hope are only

HOW WEALTH COMES INTO BEING 33

unable just for a time to contribute their fair share
to the country's work. And of course there are all
the children; but it is hardly fair to count them with
the invaUds and the idlers, for they are busy growing
up, and in due time may be able to help in producing
more than they consume, so that over the whole
period of their lives they may have given as much,
or more, to the community than they have taken out
of it. There are also the old : but in the same way
we may assume that in their working days they
have produced enough to maintain them in their
old age.

Nor must we be too narrow in our definitions. There
are many people who do not seem exactly to be
adding to the nation's wealth, such, for instance, as
violinists or singers. But probably we shall be right
in thinking that it is well worth the while of their
fellow human beings to support them, because the
immense pleasure their musical skill gives to us
ordinary people so refreshes us that we are able to
go back to our own work and do it all the better for
having Ustened to them.

There are, too, others whose work may seem of no
value for the moment, such as the work of the men
and women who give their lives to research. They
may perhaps get no results for years and years. But
in the end they, or those who come after them and
use their work, may make some discovery which will
enormously affect the health or the happiness of
mankind. Again, there are many who are indirectly
contributing to the prosperity of the world by the
help and care they give to those who are actually
working. Without such help the work done might
G.s. c

34 GETTING AND SPENDING

well be less in quantity or inferior in quality, oi
both.

In a simple community, such as a small village in
the Middle Ages, it would have been perfectly obvious
if any one tried to consume more than he produced.
But in the modem world it is difficult to know just
where to draw the Hne between what an American
writer caUs Economic Men, that is, those who give to
the conamunity directly or indirectly as much or more
than they take from it, and Social Debtors, that is those
who take more than they give. But we shall be fairly
safe in saying that the larger the proportion of economic
men, and the smaller the number of social debtors
there are in any community, the more prosperous is
that community likely to be.

CAUSES OF THE EFFICIENCY OF MAN's WORK

Thus, then, the prosperity of a country depends
partly upon the proportion of its people who are

producing as much as, or more than,
I. His Body, they Consume. But it also depends on

how much they produce, and this depends,
among other things, upon the health of the people.
We are only slowly coming to understand the
immense importance of good health. For many
a long day doctors and thinkers have been trying to
get it into the head of the ordinary average citizen
that ill-health and poor hedth are not only expensive
but unnecessary, and that it is far more important
to keep people well than to cure them when they
are Ul.

HOW WEALTH COMES INTO BEING 35

If bad health is unpleasant for an individual, so
It is for the community. The more sick people there
are the more work will have to be done by those
who keep well and strong, and the less they will have
for themselves, because what they produce has to
support them and the invalids as well. So that one
of the very first things necessary for a prosperous
people is a general knowledge of the laws of good
health, and a general desire to abide by them.

We have some way to go in this country before we
get to that position, but we are improving. Gradually
we shall come to believe that a proper respect and
care for o\ir bodies is a part of good citizenship, and
that we have no right to give other people trouble or
involve them in expense because we like to eat and
drink unwholesome things, or more than is good for
us, or because we are too lazy to take enough exercise,
or because we have not trained ourselves to be able
to control our bodies and to have good habits of Ufe.
And as we come to realise all this we shall appreciate also
the economic importance of having enough houses, and
having houses of the right kind, dry and airy and hght.

Nature gives us sunshine and air, but if we do not
make use of her gifts our health will be the worse.
We have learnt the importance of clean drinking
water, and in this country we practically never have
waves of the kinds of disease which are caused by the
use of impure water, though not so very long ago
those diseases were common here, and still are in other
lands. We have a good deal to learn in the matter
of clothing and food. On the whole people are more
sensibly clothed than they were, but any one who
walks about our streets with open eyes will certainly

36 GETTING AND SPENDING

see a good many examples of the unwise use of clothing.
Some people wear too much, some do not wear enough,
and some wear clothes of the wrong kind or in the
wrong places.

In the matter of food, too, we are, it is much to
be feared, a very long way yet from making the best
use of our supplies. On the whole, we are a well-fed
nation, but a Frenchwoman or a German would
think rather little of our housekeeping and cooking.
If they wanted to be unkind they might tell us that
we wasted at least as much as we used, and that we
often used very expensive foods when cheaper kinds
would be as nourishing and as pleasant.

We British are always supposed to be very unwilhng
to make changes in matters of food, but we were
obhged to learn a good deal about 'substitutes' in
the days of the war, and perhaps we may have profited
by what we learnt. We have certainly become a
good deal wiser in the course of the last twenty years
or so as to the feeding of young children, and there
is every reason to hope that nowadays children have
a better chance of growing up with good digestions and
strong bones than they had twenty or thirty years ago.

If healthy bodies, well trained to respond to their
owner's wishes, bodies well developed and under
perfect control, are what we should desire,
2. His Mind SO too are healthy and well-trained
minds. Some races, and some indi-
viduals, may be naturally more intelligent than
others, but all of them are capable of immense
improvement if they are really well developed. In
other words, the nation which most completely under-
stands what Education is, what it can do, and how

HOW WEALTH COMES INTO BEING 37

tremendous is the importance of a really first-rate
educational system, will be likely to go ahead. The
best educated race wiU always have a great advantage
over those which are less well educated.

Education, of course, means very much more than
just book-learning : it means the training of every
part, of body, mind, and soul. A complete system
of education would give to every child this general
training, and would as well provide all kinds of
special training for the older girls and boys. Those
who were clever with their hands would learn to use
them, those who had special tastes for scholarship,
or science, or literature, or music, or machinery, or
sewing, would all be able to get the training which
would enable them to make the very best use of their
own special gifts. In a modern state every kind of
work is needed, and what is important is that every
kind should be done as well as possible. It is also
worth remembering that education opens out all
sorts of ways of spending one's leisure time. People who
have no tastes or hobbies are apt to use their leisure in a
manner that makes them less instead of more efficient.

Some countries beheve more in education than
others, and understand better what it means. We
may be pretty sure that those countries will become
the most prosperous.

Lastly we come to the social and moral sides of
life. It is easy to understand that people who have
a high standard of honesty are more
likely to be prosperous than those who 3- ^^^^^^^^
are less honest. Allotment holders
sometimes find it necessary either to take it in
turns to guard their crops, or else to pay a watchman

38 GETTING AND SPENDING

to do so, because of the dishonesty of some of

their fellow citizens, who would steal their early peas

and beans. This is clearly a wasteful state of affairs,

for one man, who might otherwise have been producing

something, or resting, and thus becoming more able

to do his work well, has to spend his time watching

over the crops. Every nation has to spend a great

deal upon poUcemen, and much of that spending

would not be necessary if people were more honest.

Punctuality, honesty, sobriety, indeed all the ordinary

everyday virtues are extremely important when we

come to reckon them up from the economic point

of view.

Let us imagine, then, that the people of a country

are healthy, intelligent, weU educated, and virtuous.

Is there anything else to be thought

4. The laws about, before we come to discuss the
under which he ,■,■,• , , ,

lives. arrangement and plamung of work?

Much depends upon laws and customs. If
a country is unsettled and lawless, who will care to
produce more than enough for his own needs? What
is the use of working, when robbers, or bands of enemies
may seize everything? There are parts of the world
to-day where the peasants do not care to produce
more than the very smallest crops, because they know
that they are liable to be robbed of everything.
There are others who grow enough just for their
own needs, but no more, because anything more
than is actually needed may be taken away. Nothing
is so discouraging as the feeling that what you produce
may be taken from you, and Uttle or nothing given
in return. Lawlessness and disorder are fatal to
prosperity, and the history books tell us how over

HOW WEALTH COMES INTO BEING 39

and over again a long period of peace has made it
possible for a country to increase its wealth.

But apart from wars, a good deal depends upon the
kind of government in the country. The certainty of
getting real justice is very important. One of the
reasons why people are sometimes unwiUing to work
as well as they are really able to do is because they
believe that some one else, and not they and their
own families, will reap most of the benefit of their
work. Good laws, security, both as to life and as to
possessions, justice, the feeling that it is worth while
to do your best, and that nothing but your best is
worth doing are all of the greatest importance if a
nation is to be reaUy prosperous.

THE PLANNING AND ARRANGEMENT OF WORK

We have been thinking of all the causes upon which
the efficiency of the individual worker depends : his
health, his mind, his character, and his sense of
security. Next we might consider the arrangement
and planning of his work.

When we turn our minds back once more to the
early stages of civilisation, we find every one doing
more or less the same thing. The men hunt, and the
women care for the fire and cure the skins. Or the
men work in the fields, and the women help them,
and there is weaving and spinning to do as well.
Very soon men discover that by joining together
they can move a heavy log, or carry out some other
operation which one man, however hard he tried,
could never do by himself. But it is easy also to

40 GETTING AND SPENDING

imagine how one or two of the men, bolder or quicker
of eye than the rest, became the best hunters, and
how their fellow villagers might consent to do their
share of work on the land while they went off into
the forest for a few days' hunting.

The result of this division of labour might well be
more food in the end for the villagers than if they had
all stayed in the fields or all gone off to hunt. Or
again, we can imagine one of the villagers, lamed
perhaps by an accident, or in some way not strong
enough to take a full share in the ordinary work of
the village, finding that he could spend his time on
making pots, or arrows, or spearheads, and made
them, by constant practice, so weU, that it was worth
while for the other villagers to keep him supphed with
food in order that he might provide them with pots
or weapons. And thus gradually we get to the idea
of separate trades, of division of labour, and the
exchange of produce.

In the Middle Ages each Uttle group of people would
have perhaps its smith, its fletcher or arrowmaker, its
wheelwright, and other people who had special skill
or did special work. Each of these would be particu-
larly good at his own job, and would be supplied by
the other villagers with food and clothing in return
for his work in shoeing their horses, mending their
tools, and making their harness. As a matter of fact
most of these people would also cultivate a Uttle bit
of land, but not so much as the other villagers, and
here again it is clear that this division of labour leads
to an increase of wealth.

If the farmer had to stop ploughing for a few days
while he mended his harness, sharpened his tools,

HOW WEALTH COMES INTO BEING 41

shod his horses, he might lose the best of the weather,
and as a result have a poor crop. Besides this, he
would be slow and not specially clever at these different
jobs, as he would only have to perform them occa-
sionally. If, on the other hand, the smith can shoe
his horse, and the leather-worker mend his harness,
things which they can do quickly and weU because
they are specially trained to do them, and also because
they have increased in speed and skill by doing them
constantly, every one will be better off. When the
harvest is gathered in there wiU be more food for the
village.

In our own day this division of labour is carried very
far. It takes any number of different people to make
a pair of boots or a saucepan or a bicycle, each doing
one small part of the whole. The famous Scot, Adam
Smith, who lived in the middle of the eighteenth
century, and whose book upon The Wealth of Nations
is one of the greatest English works on economics,
gave a well-known and often quoted account of the
advantages of the division of labour. He described
the way in which pins were made, and pointed out
how, owing to the division of labour, an enormous
number of pins could be turned out in a short space
of time, and with very little effort on the part of the
makers.

'One man draws out the wire; another straights it;
a third cuts it; a fourth points it; a fifth grinds it at
the top for receiving the head; to make the head
requires two or three distinct operations; to put it
on is a peculiar business; to whiten the pins is another;
it is even a trade by itself to put them into the paper;
and the important business of making a pin is in this

42 GETTING AND SPENDING

manner divided into about eighteen distinct operations,
which, in some manufactories are all performed by
distinct hands, though in others, the same man will
sometimes perform two or three of them. I have seen
a small manufactory of this kind, where ten men
only were employed, and where some of them conse-
quently performed two or three distinct operations.
But though they were very poor, and were there-
fore but indifferently accommodated with the necessary
machinery, they could, when they exerted themselves,
make among them about twelve pounds of pins in
a day. There are in a pound upwards of four
thousand pins of a middUng size. These ten persons,
therefore, could make among them upwards of forty-
eight thousand pins in a day. Each person, therefore,
making a tenth part of forty-eight thousand pins,
might be considered as making four thousand eight
hundred pins in a day. But if they had all wrought
separately and independently, and without any of
them having been educated to this pecuHar busi-
ness, they certainly cauld not each of them have
made twenty, perhaps not one pin in a day, that is
certainly, not the two hundred and fortieth, perhaps
not the four thousand eight hundredth part of what
they are at present capable of performing, in
consequence of a proper division and combination
of their different operations.'

The advantages of such a division of labour are
then fairly easy to understand. A person who does
one job becomes quicker and quicker at that job,
as his mind and his muscles form the habit of doing
it, and, what is just as important, he can do it with
much less exertion. If he is continually laying down

HOW WEALTH COMES INTO BEING 43

his tools and looking for others, continually changing
his task, he wastes not only time but energy. More-
over, time has previously been wasted by his having
had to learn many different kinds of work.

On the other hand, doing one thing, particularly
if the thing is not in itself interesting, over and
over and over again, is monotonous and tiring.
Nevertheless, there can be no doubt that the
division of labour, if it is well planned and skilfully
carried out, means that a very great deal more can
be produced with very much less effort, and in very
much less time. Perhaps, therefore, we may fairly
hope that as we come to have an even greater command
than we have at present over Nature's forces, and when
we can make electricity or steam do even more for
us than they do now, the needs of the world may
be supplied with comparatively little human effort.

In other words, by the help of machinery, by the
help of brains, by clever planning and thinking, the
world can be clothed and fed and warmed and moved
and provided with all the necessities of Ufe, while at
the same time the workers need work only for a few
hours daily. The better the planning, the more
perfect the organisation, the shorter and the less tiring
need be the working day. It is perfectly possible to
imagine a world in which a comparatively short working
day will be all that is necessary, while at the same time
there will be abundance of the things that people
need.

Indeed, we are steadily getting towards this. Adam
Smith's pin-makers probably, indeed certainly, worked
for many more hours in the day than makers of pins
or any other factory workers do to-day in Great

44 GETTING AND SPENDING

Britain. And in such a world, even if the actual
tending and watching a machine is rather dull and
monotonous, as long as it is not done for too long at
a time, or for too many hours in a day, it is not, or
ought not to be, particularly tiring. At the end of the
short working day every one would have plenty of
energy, as well as plenty of time, for all sorts of other
occupations — music, books, acting, debating, motoring,
cricket, swimming, or anything else that specially
appeals to their tastes.

Different people have different ideas of happiness,
but when we are thinking about the production of
wealth it is impossible to doubt that the division of
labour, intelligently planned and carried out, means
an enormously increased production at a very
much smaller cost of human effort. Our ancestors,
in the days before machinery, worked for very
long hours, and were often short of food, while
what they had was apt to be monotonous in kind
and limited in quantity. They were without most of
the comforts we take for granted. It is not the fault
of machinery, nor of the division of labour, but of
man, that there has been so much trouble and suffering
since the discovery of steam and the use of machinery
on a large scale. Rightly used, machinery should
bring much happiness to mankind, because by its
use man can produce a very great deal of all the things
he needs, with very much less work and in infinitely
less time.

CAPITAL

WHAT IS CAPITAL? HOW DOES IT COME INTO EXISTENCE
AND WHAT DOES IT DO?

In early days man had very little wealth, and what
he had was soon used. The wood which he (or more
Ukely she) collected for fuel was soon burnt, the food
quickly eaten, the weapons soon lost their sharp
edges. By-and-by man began to realise that by
putting off using his wealth at once, he could manage
to have more of it. For instance, let us imagine he
found some sort of com growing wild, and learnt how
to thresh it and grind it roughly and turn it into
food. Then it occurred to him that a great deal of
time and trouble might be saved if he could grow his
corn all in one place, and especially if that one place
could be near where he found it convenient to Uve,
the sheltered corner, or the neighbourhood of running
water. So he roughly cleared a bit of ground, and
then in the autumn, when he gathered the corn, he
saved a part of it for seed, instead of eating it all.
It meant that he had less to eat that winter, but
that later on he would have more. The children could
scare away the birds or animals which liked to eat
the corn as much as he did, so that a better crop
would result; and also less would be wasted in cutting
and carrpng if it grew near home. So that the result
of going a little short one winter was more to eat the
next.

45

46 GETTING AND SPENDING

We can proceed a little further. Man began
to think that his crops would be fiu-ther improved
if he could cultivate the ground on which he grew
them, and for this he needed tools. So he devoted
some days, perhaps a good many, to making, as weU
as he could, the tools he wanted. This meant that for
several days he could neither hunt, nor search for wild
fruits, nor doze in the sunshine. Instead of spending
his time in getting something he would use at once,
or in resting, he spent it in getting something which
he could go on using for some time. He had now a
little capital; seed corn, and tools.

This brings us to another of the words which need
defining. Capital means that part of wealth which is
used to produce more wealth. In our story, the seed
and the tools were capital, very simple forms of it,
but certainly capital. They were forms of wealth,
for in the first place they had value, people would
have been willing to give something else in exchange
for them, and in the second they were, instead of
being used up at once, used indirectly, to make more
wealth. Man might have eaten the corn, and burnt
the wood out of which he made his tools. But instead
he sowed the corn, and used his tools, and as the
result increased his wealth. He had learnt to look
forward, to do without something in order later on to
have something else.

As time went on, man had more and more capital.
He learnt more and more to save, that is, not to use
his wealth up at once, in the obvious manner, but to
use it indirectly in such a way as to increase his wealth.
He caught a wild goat, and instead of killing it and
eating it, he tamed it, saw that it had food all through

CAPITAL 47

the winter, and then in the spring his trouble and
forethought were rewarded. The goat had kids, and
if they throve, and also if he could restrain himself
from indulging in a deUcious meal of roast kid, he
would have by the end of the summer one goat and
two or three half-grown kids, and besides that, he
would probably have liad some goats' milk for his
own food. He had become a Oapitalist, he owned the
beginning of a herd, which would, in due time, and if
the future kids were allowed to grow up instead of
being eaten, become a herd. Capital is the foundation
of all our modem civilisation, and it aU comes into
existence in the same way, that is, by putting off
using some particular kind of wealth to satisfy the
needs of the moment, and by using it instead to
produce more wealth in the future.

As time went on our friend the early man
increased his capital. He came to have not only flocks
and herds, but buildings to shelter himself and his
animals; he spent time and work in making fences
round his cultivated ground to keep out the wild
beasts. The women learnt how to spin, they made
some sort of loom and they wove rough cloths. They
accumulated a number of tools and household imple-
ments. All these are capital, because they are wealth
which is used directly or indirectly to produce more
wealth. And as son succeeded to father, quite large
accumulations of capital, such as the flocks and herds
of the Old Testament, came into being.

Some of the capital, for instance the seed com, the
dried goats' flesh, is of a kind which can only be used
once, the seed corn when it is sown, the goats' flesh
when it is eaten. The meat may be regarded as

48 GETTING AND SPENDING

capital, because man saved it to eat in the winter,
a time when fresh meat was hard to come by because
of the scarcity of food for animals, and if he had had no
meat to eat, he would have been less able to do hard
work, digging perhaps and cleaning his fields. It
was used indirectly to produce more wealth, by feeding
and strengthening him. His tools, on the other hand,
could be used over and over again, though in the end
they would wear out. The kind of capital which
can only be used once is sometimes called Circulating
Capital, the kind which can be used many times
Fixed Capital. Circulating capital is, of course,
constantly being used to make fixed capital.

Old countries are likely to have a good deal of
fixed capital, buildings of all kinds, bridges, water-
works, all sorts of machinery, furniture, scientific
tools and apparatus, plant for making gas or elec-
tricity. In a simple state of civilisation there is hkely
to be much less. It takes time to get together all
these things. It is also, of course, true that most of
the fixed capital of a country will probably be in the
towns and the industrial areas. Less fixed capital is
needed in the country, though even there we find a
good deal, houses and farm buildings, agricultural
machinery, fences, walls, gates, wagons, carts, and
motors.

To sum up. Capital is wealth which is used directly
or indirectly to make more wealth. It is the result of
saving, that is, of putting off the use of wealth and
keeping it instead for use in an indirect method.
The corn was sown instead of being eaten, the goat
kept to produce milk and kids, instead of being killed
for food, the wood made into tools instead of being

CAPITAL 49

thrown upon the fire. The saving may, of course, have
been done by some one other than the owner of the
capital, who may have acquired it by force, by gift, or
by inheritance. Wealth which is used as capital
may be used all at once, or its use may be spread
over long or short periods of time, but in any case,
if it is used to produce more wealth, it is capital.
AU wealth may be capital, but only that part of it
which is used to produce more wealth is capital.

CONSUMPTION OF CAPITAL.

If all capital comes into being as a result of saving,
it is equally true that aU capital must be used, or,
as economists say, consumed. It is only as it is used
that it does its work of helping to create new wealth.
If the seed com had never been used, but hoarded
away and in the end forgotten it would never have
produced a crop of fresh corn. It would have been
capable of becoming capital, but unless it were sown
it would not do the work of capital. All capital must
be consumed, though the consumption, that is, the
using, may take a very long time indeed. It seems
absurd to talk of a sohd building being consumed, but
in actual fact every few years it wiU need repairing,
inside or out, and it may weU be that in the course of
time nearly all the original work, or at least a very
large part of it, will have been used up, worn out,
and will have been replaced by new. Circulating
capital is obviously used and consumed at once, corn
when it is eaten or sown, coal when it is burnt.

Wealth is constantly changing its form as man

G.S. D

50 GETTING AND SPENDING

deals with it, and his methods of turning one kind of
wealth into other kinds often become less and less
direct, and mean the use of far more capital as his
inventions and discoveries increase. For instance,
the rough cloths woven and spun by the ancients were
produced with a great deal of work, but not much
capital. Our modem cloths are the result of work
certainly, but also of an immense amount of different
kinds of machinery. Enormous quantities are pro-
duced. The West Riding of Yorkshire makes woollens
almost by the mile, and these quantities can be turned
out because gradually so much capital has been
collected to help in their production. By degrees the
machinery wears out, the buildings have constantly
to be repaired. The capital is all the time being
consumed, used up, and out of what they get for the
cloth the owners of the capital must constantly put
aside enough to renew and replace their machinery,
and to keep their buildings in repair.

DESTRUCTION OF CAPITAL

One of the reasons for the unemployment and
trouble aU over the world after the Great War was
the rapid using up of capital. This happened in several
ways. The most obvious, of course, is the actual
destruction of capital as a result of war. Even here in
Great Britain, where we suffered comparatively little
from actual destruction, the air raids ruined a certain
nimiber of buildings, and others on the East Coast
had to be pulled down in order to arrange for defence
works. In France, as we all know, miles and miles

CAPITAL 51

of country were devastated, the fruit and other trees
killed, the buildings blown to atoms, all the machinery
and furniture utterly destroyed. The costly and
elaborate machinery of the mining area in the north
went to rack and ruin, the mines were flooded, the
sugar mills and other factories reduce.d to skeletons
or to nothing at aU. The result is that the whole world
is poorer than it would otherwise have been. For
all this immense amount of capital, if there had been
no war, would have been hard at work producing
wealth. In time it would all have been used up, but
meanwhile it would have poured out tons of coal or of
sugar, and of all sorts of manufactured goods, and
though it may be said that war only destroys at once
what anyhow would sooner or later be used up, it
destroys it before it has had time to do its work of
producing more wealth.

Nor is this nearly the end of the impoverishment due
to war. For, when the war is over, and the immediate
destruction stopped, not only is the world the poorer
for want of all the wealth that the destroyed capital
would have produced, but a great deal of new capital,
which otherwise might have produced other new
wealth, must be used instead to replace that which
has been destroyed. So that as a result of the destruc-
tion of Northern France we are aU poorer than we
should otherwise have been, for not only have we not
got what Northern France wotild have produced
between 1914 and 1918, but neither can we have the
other wealth which would have been produced if the
world had not had to supply capital, after the war
was over, for the rebuilding of Northern France, and
indeed of all the buildings and crops and forests

52 GETTING AND SPENDING

and factories destroyed by the war all over the
worid.

War makes us poorer in another way. While it is
going on immense quantities of wealth have to be
used, not for production, not, that is, in ways which
will lead to the creation of fresh wealth, but for
destruction. AU over the world vast masses of steel
and many sorts of chemicals were being tiuned into
guns and sheUs and explosives. Men and women were
working day and night, in all the fighting countries
and many of the neutral, to turn materials into
weapons which would destroy human life and the
wealth which was the result of human work. So that
in this way too the world is impoverished, because if
it had not been for the war, all the steel and iron
might have been turning into locomotives and turbines
and boilers and steel rails for trams or trains, and a
thousand other things useful to man, and hkely
to give him pleasure and satisfaction. Moreover, huge
quantities of food, of locomotives, of motor lorries and
motor bicycles, and all sorts of other things, were
spoilt and destroyed in the war. As time went on
all the fighting nations learnt to check this destruction
to some extent, and to perform almost miracles of
' salvage.' But even at the very best huge quantities
of useful things were hopelessly damaged before they
had had time to be much used.

War, at all events modern war, is perhaps the
greatest of all destructive agencies, but Nature some-
times does a good deal of destroying, by fire, flood,
or earthquake. The result of them aU is the same :
the destruction of wealth and the impoverishment of
mankind. Capital which might and would have

CAPITAL 53

created new wealth has instead to be used to take the
place of that which has been destroyed. Man wiU
have to work harder and to do without things which
he might have had, because of the destructive forces
either of Nature or of his fellow men. The more
highly developed, from the economic point of view,
a country is, the more destructive are the results of
war or of Nature's upheavals. In early days countries
might have been ravaged by the passing of an enemy
army, but in a few years they would recover, and this
is stUl more or less true of countries, or those parts
of a country, which are mainly agricultural. Crops
may be burned, but if there is some seed corn, some
implements, and labour, in a few seasons crops will
be growing as well as of old. It will take longer if
orchards are destroyed, and the more carefully culti-
vated a country is, the better fenced and drained, the
better provided with buildings, the more difficult it
is to restore it, and the greater the amount of capital
that will be required. So that the more developed
countries are, the more machinery, buildings, factories,
and so on, they possess, the worse they suffer from
destructive forces, whether human or natural.

CAPITAL MUST BE 'CONSUMED' OR USED

Probably even in peace and prosperity a good deal
of capital is to some degree wasted, ceasing to be
useful before it is worn out, or never being useful at
all. But most capital is hard at work making fresh
wealth, and using itself up in the process. It is only
in times of war or earthquake and flood that capital

54 GETTING AND SPENDING

is destroyed without not only replacing itself, but
doing that and naaking something more into the
bargain. It seems clear that if the work of capital
is to make wealth, the amount of wealth that can be
produced must depend a good deal upon the amount
of capital available. If early man had been so hungry
that he had eaten his seed com and his first goat he
would not have had his crops or his herds.

At any moment the amount of new wealth that
can be produced depends largely upon the amount of
food and other things that are necessary to keep the
workers going, the amount of raw material, wool or
cotton or flax, or iron ore, which can be provided, and
the amount of machinery with which to work it up. At
any moment, that is, putting this into other words, the
amount of new wealth must depend upon the differ-
ence between what is consumed and what is produced.
How much this is wiU depend partly upon the efficiency
of man, and partly upon the way in which he likes to
use what he has.

Suppose for a moment that some one has a certain
amount to spend. The first thing he has to do is to
keep himself as efficient as possible. He might spend
just as much upon food, warmth, clothes, shelter,
recreation, as would keep him as efficient as he could
possibly be. But he may have more than enough for
this, he may have something over. What wiU he do
with that ? Suppose he happens to be specially inter-
ested in food; he may spend it on rich foods and
choice wines. What will be the result? If he has
an excellent digestion, he may be none the worse,
but it is quite possible that he may do some damage
to his health and gradually become less efficient,

CAPITAL 55

in which case every one will be slightly poorer, because
he will be able to do a smaller share of the world's
work than he was originally capable of doing. He
may spend his surplus in any one of many thoTisand
different ways, which wiU either make no difference
at aU to his efficiency, or else render him less efficient.
In the first case, things are as they were, no better
and no worse; in the second, every one suffers a
httle.

There is another possible course for hira to pursue.
We are supposing that our imaginary friend has not
only enough to keep him as ef&cient as possible (lucky
man) but something more. Suppose he decides not
to use this extra amount, but to 'save' it. What
then? He might lend his surplus to his neighbour, a
farmer, who badly wants a new machine, but has not
been able to afford it. The farmer, with the help of
the new machine, gets a better crop and in a year or
so new wealth will have been created, and every one
will be sUghtly better off as a result.

As a matter of actual fact, saving is done by the
help of Banks. What really happens is that people
who save entrust their extra money to banks. The
banks lend it to those people who want more capital,
in order to produce fresh wealth. Hoarding, that is
storing away extra wealth and neither using it nor
lending it to some one else to use, is not saving :
hoarded wealth lies idle and does not create more.
To return once more to our early cultivator, he saved
com for seed. If he had never used it but hoarded it
away in case some day he might want it, no fresh
wealth would have come into existence.

56 GETTING AND SPENDING

THE EFFECT OF SPENDING UPON CAPITAL

Now if we come to think this over clearly and
carefully, we shall arrive at some probably rather
•unexpected conclusions. One is that it matters not
only to ourselves, but to every one else, how we spend
our money. If we spend it in ways that do not make
us more efficient, or in ways that make us less
efficient, we are preventing new wealth from being
created. Very few people realise that the way in
which they spend their money concerns any one
except themselves and perhaps their own belongings;
but actually it matters very much to every one. From
the economic point of view, money which is spent in
a way which does not make people more efficient, or
which makes them less efficient, is Waste. Of course
the economic point of view is by no means the only
one to be considered in real life, but it is an extremely
important one, and it is quite possible that if it were
more generally understood we might all be a great
deal more comfortably off.

One sometimes hears people say cheerfully, to con-
sole themselves for having fallen down with a tras^ful
of china, or let an apron catch fire, 'Never mind, it's
good for trade.' But is it? It may be good for the
china trade, when china faUs, but it is not at all good
for trade as a whole. What really happens is that
some capital, and some work which otherwise could
have been used to make fresh wealth has to be used
to replace the broken china. The breaker might have
had the trayful of china and something else as well,
or if she did not want anything else she might have

CAPITAL 57

'saved' her money and lent it to some one else who
did. As it is all she has is the china, and neither she
nor the some one else has any more.

Unfortunately, in the world as it is to-day there are
only too many people who have nothing at aU over
and above what is needed to keep themselves and
thteir famihes perfectly efficient, and only too many
who have not enough even for that. This unsatis-
factory state of things exists partly, no doubt, because
what wealth there is in the world is not divided among
the people in the world as well as it might be, but
also because much less is produced than might be.
All the more, therefore, is it important to think about
how we spend what we have, because what people
wish to buy determines what other people have to
make. Each little buying by itself may make hardly
any difference, but aU the little buyings taken together
make all the difference. If people insist on spending
money on more alcohol, or for the matter of that more
sweetstuff, or more anything, than they need to keep
themselves ef&cient, then more capital and work must
be put into the alcohol or sweetstuff business, and less
is available to create fresh forms of wealth, or to make
something of which there is not yet enough.

Economic waste means not only the destruction
of wealth, but also its use in any way which does not,
directly or indirectly, help to make people more
efi&cient. It is extremely difficult to draw a hard and
fast hne between what is waste and what is not.
Most of us can think of some ways of spending money
which are clearly and certainly waste. Getting drunk
is one, eating strawberries in Great Britain in December
is another. Undoubtedly the capital and work which

58 GETTING AND SPENDING

are spent in producing the alcohol which results in
drunkenness, or the strawberries grown only with a
great deal of artificial heat and elaborate glasshouses
and great care, could be far more productively used
in other ways. But short of these extreme examples
most people can probably think of other forms of
waste within their own experience.

As in many other matters, it is extremely difficult
to know where to draw the line when one is thinking
about other people, but fairly easy, if one is honest,
to judge about where that Une is for oneself. It
certainly makes the question of one's own small
spendings enormously more interesting when one
realises that upon them and all the other small
spendings of all the other individuals, so much depends.
The greatest need, economically, after a tremendous
war, is for the wisest use of the wealth that is left,
and for saving, in order that fresh supplies of capital
may take the place of all that has been destroyed.
Wealth used to increase efficiency, or saved and used
as capital which creates fresh wealth increases pros-
perity : wealth used in ways that do not increase
efficiency or that diminish it, or wealth hoarded, make
the world less well to do than it might otherwise be.

Each time one makes a purchase one is helping to
do what economists call create a demand, that is, one
helps to direct capital and work into some particular
channel. If that channel leads directly or indirectly
to the creation of fresh wealth, it is used economically.
If it is used in a way which creates no fresh wealth
it is destroyed, comes to an end. The person who
used it may have had some satisfaction from his use,
but no one else will ever benefit by it.

CAPITAL 59

Another unexpected result has now appeared, and
that is that it is impossible to make work. All that
can be done, to begin with, is to decide what sort of
work shall be done. At any moment there is a certain
amount of wealth which can be used to provide more,
and therefore a certain amount of work which can be
done. What is in the power of those who control that
capital is to determine what kind of work it shall do, and
they will determine that, broadly speaking, by thinking
about what sort of things people are likely to want.
Upon their decision, which in its turn depends upon
the ordinary everyday people's wants, or demand,
depends the kind and amount of new wealth produced.
For instance, a certain amount of capital and work
is used in producing strawberries at Christmas time.
But when they are eaten they cannot, directly or
Indirectly, have helped to produce more wealth.
No one really needs Christmas strawberries to keep
himself efficient. If the capital and work used for
the strawberries had been used in building, a house
(or part of a house), which could have sheltered some
one, would have come into existence, and its existence
would have helped that some one to be efficient, and
to go on producing wealth. (One of the greatest
causes of inefficiency is the want of enough really good
houses.) 5

The unproductive use of wealth, for instance
growing strawberries in December, is Uke throwing a
small stone against a brick wall. There is a crash and no
more. The other, or productive use, is more like throw-
ing the same stone into a lake. The circles go on
widening and widening for a very long while. This
is not really a good simile, because perhaps if we

6o GETTING AND SPENDING

could hear them the echoes of the crash would go on,
and the circles end at the edge of the water. But the
idea which is important and interesting is that capital
productively used goes on and on increasing, while
capital unproductively used comes to an end.

Spending, then, does not make work, but it does
settle what sort of work shall be done. And upon
that decision will in the end depend the amount of
wealth that comes into existence, and therefore to a
very great extent the amount of work that can be
done next. It is easy to see the importance of all this,
and it is a pity that it is not more generally under-
stood. Many good people, really anxious to help,
direct spending, the spending of their own money or
that of pubhc bodies, in a way which in the end
means that less and not more wealth is available for
the community. A clear understanding of the
importance of all these matters would certainly be a
very great help in pubhc Ufe. It needs a good deal of
thinking about, but it is one of the questions which
concern us all, and which, if we understand it, will
make us more valuable as citizens, as weU as making
our daily Ufe and our own Uttle spendings infinitely
more interesting. The economic effect of spending
is not the only effect that citizens are called upon to
consider, but it is a very important effect, and one
which needs a good deal more considering than it
generally gets.

IF ALL THE PRODUCTIVE FORCES WERE AS
EFFICIENT AS POSSIBLE

NATURE AND MEN

We have been thinking how wealth is produced, and
upon what sort of causes the amount of production
depends. Let us amuse ourselves briefly by imagining
a country in which all the agents of production. Nature's
forces, man's work, and capital, are as efficient as
possible.

First, Nature will do her best. Our imaginary
country wiU have a temperate climate, cold enough
but not too cold in winter, hot enough but not too
hot in smnmer. There will be a sufficient rainfall,
and the rain wiU be obliging enough to come when it
is wanted, not, for instance, just in the middle of the
harvest. In fact, our own climate, at which we love
to grumble, when it is on its very best behaviour, is
not so far removed from perfection as we are apt to
think. It is wet, but not too wet, and as a rule frost
and sun do their work pretty well.

Then this fortunate land must have good harbours,
well distributed, well sheltered from the prevaiUng
winds, and good waterways, leading conveniently
into the heart of the country. The hills and
valleys will be arranged in such a way as to make
good roads> whether for trains or other transport,

easy to construct, so that every part is easily

6i

62 GETTING AND SPENDING

accessible, and produce can be moved about in
all directions with very little trouble or difficulty.
There should be several varieties of soil, so that
all kinds of crops can be grown, and there must
be hills £ind sheltered valleys as well as open plains.
Lastly, there must be either coal, or else enough water
power to make plenty of cheap electricity. Perhaps
a sprinkling of other metals, and certainly some iron,
would help.

So much for Nature. Now what about Man ?

The population of the country will be thoroughly
healthy. They will have started with good sound
bodies, and will know how to keep them strong and
well. They will have plenty of outdoor exercise,
games and otherwise, when they are young, and they
will have a love of the open air. At this point it seems
clear that they must hve in a new and not an old
country, for they must occupy good dry airy sunny
houses, and there must be no slums. Yet there is
hardly an old town which has not slums : they seem,
indeed, part of the price we pay for age and history.
Slums, however, there certainly cannot be, they always
mean bad health and inefficiency. The houses will
be arranged so as to save all uimecessary labour, and
much of the work will be done by electricity.

The towns will be more like our garden cities, planned
so as to allow of air and sun for every house, and it is
certain that there will be no smoke. Somehow or
other our fortunate friends will have learnt to deal
with the smoke nuisance, and will in consequence
save an enormous amount of the capital and labour
that we have to spend upon soap, cleaning materials,
and the restoration of buildings which crumble away

EFFICIENT PRODUCTIVE FORCES 63

through the action of the smoke. It is difficult to
think of anything which makes more work than dirt,
and most of our town dirt is directly due to smoke.
Imagine London or Manchester without smoke, and
think of the saving in laundry, dusting, scrubbing,
cleaning, and painting.

Partly because the people will be so well educated
that every one will be able to make the very best of
his or her capabilities, and partly because of the
absence of restrictions, each person will be doing the
work for which he or she is fitted. There will be very
few square pegs crushing uncomfortably into round
holes. The heavy and disagreeable work will be done
mostly by machinery, that is, by Nature's forces
harnessed and controlled by man. As every one is
doing the work for which he or she is best fitted, and
as education will have trained them all to make the very
best of their faculties, they will be able to produce
great quantities of wealth with what to us might seem
remarkably little effort. (Perhaps, if some of our
remote ancestors were to come to life again and watch
the performances of modern machinery they would
think our lives amazingly easy compared to theirs.)
Every one will be keen to improve the methods of
production, and not only the people whose specially
good brains or special powers of foresight have led
to their having the direction of work, but also those
who are actually doing the work, wiU be thinking of
new and better ways of carrying out the different
operations.

And partly because of the highly efficient pro-
duction, and partly because of the widely-spread
habits of saving, there will be plenty of capital

64 GETTING AND SPENDING

with which to carry out all improvements. Every
one and everything wiU be so efficient that wealth
wiU be abundantly produced, every one wiU be so.
well educated (among other things in economics)
that there wiU be no waste. So that the excellent
banks and the highly skilled bankers will always have
supplies of capital available for inventors, manu-
facturers, farmers; in short for every one who
needs it in order to improve and develop pro-
duction.

There will clearly be no war, or fear of war, so that
the work both of hand and brain, and the valuable
material, which we in our own imperfect world have
to devote to the mihtary and naval preparations that
we believe essential to safety, can all be used for
other forms of production.

If there were no wars and no smoke an incal-
culable amount of work and wealth would be set
free to produce more wealth, and our imaginary
country would produce all that was strictly speaking
necessary to maintain its efficiency with great ease.
The rest of its time and its brains and its capital it
could devote to the things which may not be
essential but are certainly agreeable and worth
having, and which have not hitherto been avail-
able for every one, though it is worth remembering
that practically every one now has access to comforts
and luxuries which were not only unheard of but not
to be imagined quite a Uttle time ago. For instance,
motor omnibuses, electric trams, and chars-a-bancs
enable people to move about with ease and speed,
the opening up of new countries and the immense
improvements in transport have made it possible for

EFFICIENT PRODUCTIVE FORCES 65

us to have a variety of food all though the year which
would certainly have astounded the housekeepers of
a hundred years ago. Our methods of production
have improved and are improving, though we still
have some way to go before we get to the position of
our imaginary friends.

G.s.

DISTRIBUTION

HOW WEALTH IS DIVIDED

FOUR SOURCES OF INCOME

While we have been thinking over the production
of wealth, and the various causes which determine
the amount that comes into existence, we have said
nothing about the other side of it, that is, how is
wealth divided among the different kinds of people
who make up a nation? As we all know, this is the
aspect of the question about which in real Ufe people
naturally are very much interested, and which we often
hear discussed. But as we said at the beginning,
it is no use arguing about how to divide up wealth
until we know whether there is going to be any wealth
to divide. And in the same way, it is easier to think
out, as clearly as we can, the conditions upon which
the production of wealth depends, and then go on to
find out, if we can, how it is divided. Let us remind
ourselves once more that we are first tr5dng to dis-
cover what is, and why it is, so that we may be better
able later, as citizens, to see how best we can
adjust matters according to what we think ought to be.
Now although we are, for the sake of clearness,
thinking out first production and then distribution,
in actual hfe they affect each other constantly. If

workers of any kind, whether they work with their

66

HOW WEALTH IS DIVIDED 67

hands or their brains, or best of all with as much as
possible of both, do not get enough to keep themselves
thoroughly efficient, it follows that less wealth will
be produced than would otherwise be the case. Or
if, again, the owners of capital are discouraged, either
by special laws, or by the absence of security, or any
other reason, they will be less inclined to save, or even
will refuse to save, so that there will be a scarcity of
capital, and once again less wealth will be produced.
We need, therefore, to be constantly thinking first
about the amount produced (a side which is extremely
apt to be forgotten), and second, about the methods
in which it is shared between the different sets of people
in the nation.

In some ways the questions of distribution are harder
to work out, because they seem more liable to be
affected by the changing of laws and customs. So
that, for simplicity's sake it is best first to think of
simple conditions, and then to see how far those
conditions are true of the country, whichever it may
be, with which we are concerned. There are certain
things which are true of all modem countries, and
other things in which they differ. We try to think
first of the things in which they are aUke, and then
we can add the things in which they differ. We all
have the same skeleton but the rest of us is different.
A picture of a skeleton would not be a portrait of
any one of us, yet, unless a sculptor knows something
of the human skeleton, his statues of human beings
are not hkely to be satisfactory. We will concern
ourselves at first with a sort of skeleton which will
be true of all modern civilised countries though it
will not be the whole of the truth of any of them.

68 GETTING AND SPENDING

We will take it for granted that people and things can
move with absolute freedom about the country, and
that there are no laws to prevent them. And we will
assume too that buyers wish to buy cheaply, and that
sellers wish to sell at as good a price as they can get.

Economists group the people who are going to share
the total wealth produced into four classes, according
to the reason why they get a share of this wealth.

There are first of all the owners of land or other
natural agents, who get Rent. These rent-receivers
may be individuals, or groups of people Uke town
councils, who represent aJl the ratepayers of the town,
or like the trustees of a hospital or a school; or the
Government, which represents all the people of the
country. Land in Great Britain, for example, belongs
partly to individuals, partly to groups of people, and
partly to the state.

Next there are the owners of capital, who get Interest.
Every one who has money in the Post Office, or in a
War Savings Certificate, or a share in the Co-operative
Society, is a capitalist, and is paid for the use of his
capital by receiving Interest. Thirdly, there are the
people who work for pajmient, with their hands or
their brains, or both, and who are paid in Wages or
Salaries — two words for the same thing. And lastly,
there are the people who manage and organise the
business of production, who use land and capital and
employ workers, who seU the things produced, and
earn Profits, that is the difference between what it
costs them to make the things and the price they
can get for them.

That is, people get a share of the total product
either because they own land, or because they own

HOW WEALTH IS DIVIDED 69

capital, or because they use their hands or their
brains, or both, to help produce wealth. In real life
people may get their incomes because of any one or
two or even aU of these reasons. Many millions of
people now own war bonds of one kind or another,
or have money in the Post Office or other savings banks,
or shares in a Co-operative Society, and therefore
receive interest. Most people receive wages or salaries.
A good many, though not so many here as in some
countries, own a bit of land. And a good many people
are using their powers of planning and organising in
order to make profits. We can imagine some one,
for example, who has some war savings and some
shares in a Co-operative Society, has inherited a
few shares in a local concern or a railway, and
gets interest upon them, and also owns a little
bit of land upon which his house and garden
stand. He works at some trade or profession for
which he gets wages or salary. And lastly, in his
spare time he breeds prize rabbits or poultry,
and by his sldll in managing them he earns profits.
He is one person in flesh and blood, but in our
eyes he is a landlord, a capitalist, a wage-earner,
and a profit-maker, or manager of business.

We will now try to work out the reasons which
determine how much he gets in each of these capacities,
or putting it more scientifically, upon what depends
the amounts of Rent, Interest, Wages, and Profits.
Meanwhile we see that once more we, as economists,
are using words to mean one special thing, words
which are used much more loosely and vaguely in
ordinary life. We shall therefore have to be careful
in our definitions as we go along.

RENT

WHAT IS IT, AND WHY?

The very first thing that has to be said about

Rent is that economists mean one thing, and ordinary

people something else, by the word. When we hear

people talking in daily Ufe about Rent, they usually

mean all that they pay for their use of a house, or of

a house and land. But to the economist Rent means

the amount that is paid for the use of the land only.

The name of a very famous EngHsh economist, Ricardo,

who lived at the beginning of the nineteenth century,

is always associated with the economic theory of rent,

and although later thinkers have written pages and

pages about his theory, Ricardo was such a clear and

logical thinker, that while they have added to it and

developed it, they have not really altered it very

much.

Ricardo began by imagining how it was that rent

came to be paid at aU, and after that he proceeded to

think out a means of measuring the amount of rents.

It is clear that in a new country, or for the

matter of that in ancient days, as long as there

was any amount of equally convenient land to be

had for the taking, no one would be wiUing to

pay anything for the use of land. Rent does not

come into existence at this stage of affairs. Let

us imagine that a new bit of country is opened

70

RENT 71

up, and that a group of settlers goes out to
cultivate it. Each of them takes possession of as
much land as he can conveniently work, and gets it
into order.

By-and-by somfe more people come along, also want-
ing land. But by the time they get to the settlement,
they find that although there is plenty more land
to be had, it is not so convenient to work as is the
land which the first group occupy. Either it is less
easy of access, farther perhaps from the rail-head, or
the road, or else it is not so well watered, or it does
not get so much sun, or it is farther up the hill and
steep, difiicult and tiring to work, or the soil is poorer.
However, they take possession too, and settle down
to farm. We will imagine that they are growing com
(or apples or beef or anything we hke). They are
farming not only to feed themselves, but for a market.
They want to sell their produce. Now the first group
of people find that in order to pay their running
expenses, to keep themselves, and to allow what is
necessary for replacing worn out capital, they must
sell their produce at a certain price. The buyers in
the market at which they sell are willing to pay this
price — ^let us call it X — and they can make a com-
fortable Uving out of their farming.

But what of the second group of settlers? They
are not in the same position. Their land, we have
supposed, is either less convenient or less fertile.
Whatever the exact reason, they find that unless they
can sell their produce at a little more than X they
cannot make a hving out of the business. However,
the buyers are quite willing to pay more than X — let
us say X plus one — because there is a keen demand

72 GETTING AND SPENDING

for the produce of this group of farms, com or apples
or whatever we imagine it to be. So the second
group of people get X plus one for their produce,
make a sufficient hving by their farming, and are
quite happy.

Meanwlile, however, the growers belonging to the
first group find that X plus i is the price that can be
got for their produce, and it is not hkely that if they
can get X plus i they will go on seUing at X. So they
too get X plus I. They will therefore be getting for
their produce more than the sum at which they would
be willing to sell, and still find it worth while to go
on farming. The difference between what they are
getting, and what they would be wiUing to take,
rather than go out of farming, is due, not to any skill
of theirs, but to the fact that they happen to be
farming more convenient land. And it is this difference
which economists call Rent. It need not necessarily
be paid away by the farmer to any one else. But as
long as there are lands of differing convenience, or
productivity, or whatever we like to call it, the more
productive lands will have an advantage over the
less productive, and the measure of their productivity
will be the measure of their economic rent.

We might have gone on with our imaginary settlers,
and added several new groups, each taking up land
which for one reason or another was less productive,
or less convenient, than the land taken up by the
earlier groups. Each group of settlers will need to
charge a slightly higher price for their produce in
order that it may be worth their while to go on farming.
But each time they charge a higher price all the other
groups of settlers will raise their prices too, for no one

RENT 73

in an ordinary business world is likely to take less than
he can get for his produce. If the settlers in group
number one find that the settlers in the last new group
can get X plus 5, let us say, then X plus 5 wiU be the
market price, and all the farmers will charge X plus 5 for
their produce. But as a result all the earher groups will
be getting, not only the amount that they need in
order to make it worth while for them to go on farming,
but also a Rent, varying in amount with the produc-
tivity or convenience of their land, but due, not to
any effort or skill of the farmers, but to the quality
or position of the land they work.

This process can go on until the market, that is the
customers, refuse to pay any more. Their demand
is satisfied, they would rather not have any more if
the price is going to be any higher. They can do very
well with what is produced now, they will pay the price
necessary to induce farmers to produce that quantity,
but no more. So when that point is reached, there
wiU be one group of farmers, the last who arrived,
making just what they need in order to induce them to
go on farming, and aJl the other groups making that
and something over and above that, and the something
is Rent. The amount of rent that each group wUl
get will vary with the convenience and productivity
of each group of farms, the first, which we imagined
to be the best, getting most, and the last but one getting
least. Economists call land which it is just worth
while to farm at the existing market price, but which
could not be farmed if prices went any lower, marginal
land, and this land can clearly pay no rent.

If we want to go on and make our imaginary groups
a little more hke things as we know them here to-day,

74 GETTING AND SPENDING

we can easily do it. Let us suppose that one of the
group-one farmers gives up farming, or dies, and that
his son who succeeds him does not at all like farming,
but wants to study medicine, or engineering. He finds
some one belonging, shall we say, to the last group,
who is hesitating about whether he will cultivate a
marginal farm. It is worth his while to do so, but he is
newly married, and the marginal farms are a long
way out, and his wife will be lonely. The new owner
of the first-group farm offers him his farm, but says
that he must pay rent for it, the amount of the rent
to be the difference between the price at which the
produce can be sold, and what it costs to produce it,
allowing for everything. The man is wilhng to pay
this rent, he will be just as well off as if he were
cultivating marginal land and pajdng no rent, and his
wife will have the advantage of neighbours, or of being
near the rail-head, or the shops, or whatever it is that
helps to make this farm more convenient than the
marginal farm. Meanwhile the owner of the first-group
farm can go off and work at his engineering, Uving
meanwhile upon his rent.

THE THEORY OF RENT: SOME ILLUSTRATIONS

Now all this is artificially simpUfied, and in real Ufe
there are many comphcations. Nevertheless, the
essential truth that we have worked out by means of
making it very simple remains the same. At any
moment, the price of any agricultural produce wiU
be the price which is enough to pay the cost of pro-
duction upon the least productive land used for that

RENT 75

kind of crop, including the carriage to market, and
the rate of profit which is enough to induce the
farmer to go on farming. It cannot be less than
this, otherwise the quantity required cannot be
produced, and it will not be more, because, if it
were, fresh land would be taken into cultivation, land
which is less productive or less convenient (because
naturally the best land would be used first) and upon
which produce can be raised at the market price.
But as long as there is only one price for produce,
and there are lands of differing degrees of productivity,
the more productive lands will produce rent, and the
amount of the rent will be the difference between the
productivity of the piece of land in question, and that
of the last land which it is worth while to cultivate
at the prevailing price, land on the margin of
cultivation.

One of the things people usually find puzzUng when
they begin to think about this economic doctrine of
rent, is the idea of no-rent-land, land which can be
cultivated without the cultivators being obUged to
pay any rent for it. But as a matter of fact in old
countries no-rent land generally exists, not in whole
farms, but in odd fields or patches of land on a farm.
Many a farmer has one or two fields or parts of a field
on his farm, which it is only just worth his while to
cultivate. If his landlord did not throw in those fields
with the rest of the farm it would make no difference
to the rent. They are not worth pa57ing for. Again,
the amount paid by a farmer to his landlord in this
country includes a certain amount of Interest on capital.
His rent includes what he pays for his house, and for
his farm buildings. He calls this rent, but it is really

76 GETTING AND SPENDING

interest. The owner of the land has put capital into
his fann, and upon this capital he will be paid interest.
In bad times it may easily happen that the amounts
paid by some farmers are only just enough or even not
enough to pay interest upon the capital sunk in their
farms, and leave nothing over for true rent.

Only a very small proportion, as a rule, of what is
paid for the use of a town house is really rent, most
of it is what is paid for the house, and only what is
called the ground rent, that is the payment for the
actual land upon which the house stands, is economic
rent. People are, as a rule, willing to pay very high
ground rents for land near the centre of a town, because
of its convenience, or the saving of time in moving
things to market. These ground rents a.re a good
example of the sort of thing which we have been
imagining. The larger the town grows, the more
valuable, because the more easy of access, or con-
venient, wiU be the land nearer the centre of the
town, and the higher will be the rent which people
will gladly pay for the use of this convenient land.

We can put eJI this in another way, and surprise
most of our friends, by saying that rent does not enter
into price. Most people, of course, are quite certain that
rent does enter into price, and that high rents make
high prices. We, however, saw in our imaginary story
that as long as the price of their produce was only X,
no one in our settlement paid any rent. It was not
until prices rose beyond X that rents came into exist-
ence. As we saw then, it was because prices were
high that rents could be paid, not because rents were
paid that prices were high.

We shall be able to discuss the question of prices later

RENT 77

on, but meanwhile it seems clear that what determined
price was, on the one hand, what people were wiUing to
pay rather than go without the article in question, and on
the other, what it cost to produce the crop on the least
convenient land that at the current price could be
used for that crop, or, as the economists say, the cost
of production upon land on the margin of cultivation.
Now, whoever gets the rent, rent comes into existence
as soon as two pieces of land, of varjdng convenience,
are used for the production of the same kind of crop
meant for the same market; and whatever happens
to the rent, only one price will be charged for the crop
in question as long as people are willing to buy it at
that price.

We can easily prove the truth of the saying that
rent does not determine price by trying to think what
would happen *to prices if rents suddenly vanished.
Let us suppose that some one is about to open a shop,
(let us have a change from crops.) He has the choice of
two, each equally good as regards buildings and fitments,
but one is in a side street, and the other in a main
thoroughfare near the middle of the town. The
owners demand a very much higher rent for this one.
Which shall he take? Let us suppose he decides to
take the dearer. He expects to be able to pay the
higher rent in one of two ways. Either the superior
position of this shop will enable him to get at people
who are willing to pay high prices for what they buy
rather than go out of their way to look for cheaper
things — busy people or rich people. Or else, because it
is on a main road, he wiU be able to sell many more
articles, and though he will not charge a higher price
for them he wiU make more altogether, because his

78 GETTING AND SPENDING

' turnover' will be so much larger. Anyhow, he knows
what price he can expect to get for whatever it is he
means to sell, and he reckons that the superior
position of the expensive shop makes it well worth
his while to pay the extra rent for it.

Let us, for example, imagine that he means to sell
boots. The people who shop in. the fashionable street
are ready to pay a high price for their boots : those
who cannot afford expensive boots go and shop in
more modest quarters. Or let us imagine that he is a
tobacconist. He hopes by having a shop in the main
thoroughfare to sell so many packets of cigarettes
and tins of tobacco, to those who are obliged to pass
his doors that again he can afford to pay the high rent.

Now, suppose he wakes up one fine day hke people
in story books, to find that a rich and unknown
relative has died, and has left him the freehold of his
shop. He will no longer have to pay any rent. WiU
he lower his prices ? Not a bit of it. Why should he ?
His customers are wiUing to pay the price : if he
could have done a more profitable business at a lower
price he would have lowered the price already. He is
working at the price which pays him best anyhow,
and he will continue to sell at that price. He will be
a richer man than before no doubt, but it will be
because he has become a landlord and a rent owner
as well as a shopkeeper. But whatever else he may do
with it, he will not make his customers a present of
his rent. That is, not if he is an ordinary business
man, living in the ordinary business world about
which we are thinking and reasoning. So that once
more we see that rent, that is economic rent, does not
enter into price.

RENT 79

THE LAW OF DIMINISHING RETURNS

Ricardo, contemplating the operations of the farmers
in his day, and thinking over the theory of rent, was
led to some depressing conclusions. He saw that
there were only two ways in which to increase the
amount of agricultural produce. One was to take in
fresh and hitherto uncultivated land, but that process
would necessarily come to an end when aU the avail-
able land had been used up. When that happened,
what man had to do was to intensify his production,
that is, by putting in more work and more manure
to get more produce out of his soil. But Ricardo
realised, what indeed most of us who have tried our
hands at gardening or farming operations have usually
discovered to our cost, that there comes a point at
which this ceases to pay. After a certain time, when
one has arrived at a certain stage in cultivating, each
addition to the labour and capital that one puts into
one's land brings in a less and less return until one
comes to the point when it brings in no return at
all. This is what economists call the law of diminishing
returns.

Thinking over this law, Ricardo was forced to con-
clude that the prices of agricultural produce would
go on and on increasing, until they were so high that
people would no longer buy, and would either leave
the country in search of lands where living cost less,
or else would be unable to marry and have families.
In either case the population would cease to grow,
and the demand for agricultural produce would no
longer increase.

8o GETTING AND SPENDING

We must remember that Ricardo was living in
times not so very unlike our own, at the end of the
Napoleonic wars, and that during the war he had
seen with his own eyes worse and worse land going
under the plough, and corn being grown upon what
was indeed the margin of cultivation. The price, as
we should expect, had risen tremendously high, and
it had been very dif&ciUt to get any com in from
Europe. We have seen the same sort of thing happen-
ing, though not to so great an extent, during the
great war of our own times, when owing to the sub-
marines we had to grow as much corn as we could at
home, instead of getting it from abroad.

But what Ricardo did not allow for, at least did not
allow enough for, was man's ingenuity. The law of
diminishing returns is indeed true, and does con-
stantly threaten mankind with rising prices of agri-
cultural produce. But whenever man begins to feel
rather uncomfortable, owing to the operations of this
law, he turns his brains to work and tries to think of
a way of dodging it. Hitherto he has done pretty well,
indeed from one point of view we could describe all
economic history as a long struggle between man and
the law of diminishing returns, in which so far man
has had the upper hand. He discovers new methods
of cultivation, new rotations of crops, new ways of
applying his knowledge of chemistry to agricultural
operations.

The way he evaded it just after Ricardo's day was
by the development of steam transport and the opening
up of the new worlds of North America and the
Argentine, which have fed us successfully ever since.
It looks as if agricultural chemistry were going to

RENT 8i

solve the problem for us in the immediate future, but
it is rash to prophesy. All we can say is that when-
ever the price of food becomes, or looks as if it were
going to become, permanently and uncomfortably
high, man sets his wits to work and finds out a way
to bring it down again. And so far he has succeeded
in keeping himself comfortably fed.

However ingenious man may be, it does seem as if
the growth of population must necessarily mean an
increase in rents. The more people there are to crowd
upon the earth's surface, the more valuable pieces of
that surface must become, and the more will people
be wiUing to pay for the use of specially convenient
pieces. A great many people feel that this increase
in rents, which is due to no special skill or wisdom on
the part of the owners of the land, ought to go not
to individuals but to the community, in one form or
another. It is a large and difficult question, and
not one which can be discussed here, indeed there are
volumes and volumes already existing which deal with
it. But it is just worth while saying that the owner
of agricultural lands, if he knows his business, renders
a very real service to the community, for which the
rent he receives may be taken as the payment.

It is certainly to the interest of the community that
land should be used in the most productive way that
is possible, and that the methods of cultivation should
be the very best. Human nature being what it
actually is, and not what speakers and writers and
even economists assume, it is possible that if a man
occupied very good land, and did not have to pay the
economic rent for it, he might not take the trouble to
get the most out of that land.

G.S. F

82 GETTING AND SPENDING

Let us go back to our imaginary friends the settlers,
and let us suppose that there are about six sets of
them and that the price of produce is therefore
X plus 5. We saw that the first set could make a very
comfortable living when the price was only X. There
is, therefore, to say the least, a chance that the first
set, or some of them, will be tempted not to do the
very best by their land, but to grow about as much as
will enable them to maintain themselves comfortably,
with perhaps a httle over. But their land, if it is
properly worked, will, as we know, do a great deal
more than this, and it is all to the advantage of the
world that it should be made to do what it can. There-
fore we may say that a landlord who knows his business,
who keeps his farm buildings in proper condition, and
by the careful selection of tenants does his best to
ensure that his land is made to grow as much as it
possibly can, is well earning his rent.

It is said that the highest rented districts are as a
rule those where farming is best, and that in the
districts where rents are below the economic rent,
one may find a farm here and there cultivated as
highly as possible, but that the general level of culti-
vation will be below the level it could attain. Many
of those who know most about farming, in this country
at all events, hold that a landlord who knows his
business and does it efiici6ntly is anything but a
social debtor.

Whatever we may think about the uses of landlords,
urban or rural, and it is a question about which
there is room for every shade of opinion, we have now
worked out for ourselves the nature of economic rent;
the laws which determine its amount; and the law of

RENT 83

diminishing returns, with its relation to these matters.
We must remember, when we try to apply this reason-
ing to the questions of to-day, that land which is
"marginal' for one use may be very valuable for
another, and that therefore marginal land is not a
fixed quantity. For example, dry gravelly land, which
is remarkably bad for farming, is perfect for the site
of dwelling houses, and although it would be an
excellent example of No-Rent land from the farming
point of view, it might easily command a high rent
if the growth of a town made it suitable for building
sites.

If all land were let on strictly business principles,
rent could never be higher than the 'economic' rent,
because no one would be willing to pay more than
the difference between the productivity of the land
he was using and the land which was at the time
'marginal' for that purpose. Nor would it go below,
because the owner of the land could always find
some one who wanted to use that land and would
be willing to pay for its use. The rents of building
sites in towns are, as a general rule, regulated by
strictly business principles, and town ground-rents
therefore more or less correspond with the economic
rent. In the country, however, many other influences
come in — sentiment, tradition, family feelings — and
agricultural rents are very often below the economic
Umit.

INTEREST

WHAT IS IT, AND WHY IS IT PAID

We saw that one of the things necessary for the
production of wealth is that there should be a margin
between what is produced, and what is immediately
consumed, and, also, that the wealth which was not
used up at once should be used as capital, that is,
used to produce more wealth. Interest is the price
paid for the use of capital, and what we have to con-
sider is first, why people are wiUing to pay it, and
secondly, what settles how much they wiU have to

pay-
First, then, people are willing to pay for the use of
capital, because by using it they increase their wealth.
As we have already discovered, when capital is used
it not only produces the same amount of wealth as
was ' consumed ' in the process of using it, but something
over and above that amount. Our early man sowed
only a few measures of com, and reaped, when harvest
time came, many times as much as he had sown.
People who possess capital, to put it the other way
round, are justified in making a charge for its use
if they lend it, because if they did not lend it, but used
it themselves, they would have in the end not only
the original amount, but that amount and something
more. How much the something more would be
must depend on many things, but as there would be

84

INTEREST 85

something more if they kept their capital for their
own use, they can well say to the person who wants
to borrow it from them, 'By all means, but you will
pay me back in time, and you wUl pay me back not
only just what I am lending you, but more,
because my loan will enable you to increase your
wealth.'

As most people know, this idea of the productivity
of capital was not fully understood in the Middle
Ages, and lenders were forbidden to charge for the
use of their capital. As time went on, it became
clearer that it was desirable not only to allow the
payment of interest, but almost to encourage it, in
order to encourage the accumulation of capital,
and thus to encourage also the production of wealth.
But in old days a good deal of borrowing was done,
not for productive purposes, but perhaps to carry on
wars, or for other purposes unUkely to lead to the pro-
duction of wealth, and as those who could lend were
very uncertain if they would ever get their loans
repaid, they were apt to charge exorbitant prices, and
thus make themselves extremely unpopular. People
who borrow in order to get themselves out of difficulties
are always hkely to be in a different, and a worse
position, than people who borrow for economic
reasons, that is in order to produce. However, we
need not now concern ourselves with mediaeval ideas,
and we can go on to discover what determines the
amount that borrowers will have to pay for the use
of capital, that is, on what does the rate of interest
depend ?

The interest that is actually paid depends on two
things; first, the actual rate of interest pure and

86 GETTING AND SPENDING

simple, and secondly, an allowance for risk. Thus we
shall find that there is always what we can call a
"market rate' of interest, and that some borrowers
will have only to pay this, some rather more, and
some a good deal more. The difference will depend
upon how far the lender feels certain of getting his
capital back again. Borrowers who can offer perfectly
good 'security,' and borrowers who can only give a
doubtful security wiU naturally be in different positions.
So that the rate of interest which any borrower will
pay will consist of two elements, one pure interest,
and the other insurance against risk. In Great
Britain, for example, the Government, or for that
matter the London County Council, or the Council
of any big town, can borrow at a much lower rate of
interest than can most business firms. This is because
they can offer something very like perfect security,
and there are always a good many people who would
rather take a low rate of interest and feel that their
savings were absolutely safe, than a higher rate and
not be perfectly sure of being repaid in the
end.

Apart from risk then, what settles the rate of real
interest, that is the pure pajonent for the use of the
loan ? The rate of interest at any moment will depend
upon two things. The first is the amount of capital
which can be lent, and the wilHngness of its owners
to lend it, and the second is the number of enterprises
which at the moment are needing capital for their
development, and how productive those enterprises
are likely to be. To put it shortly, interest at any
moment depends upon the demand for, and the supply
of loanable capital at that moment.

INTEREST 87

THE DEMAND FOR CAPITAL WHICH CAN BE LENT

Let US look at it first from the point of view of
the borrower, and let us for simplicity's sake think
of that borrower as a person who is engaged in pro-
duction, and who will decide whether or not he will
borrow according to whether or not he thinks it will
pay him to do so.

Let us imagine that he has a factory and
produces buttons, or boots, or anything else we
like to imagine. He knows what rate of wages he
has to pay, and about how much his workers will
turn out, he knows too what price he can get for his
goods. There is a new machine which he has seen
and which he would very much like to possess. Shall
he borrow a thousand pounds and buy one? He
makes long and careful calculations. The use of the
machine would enable him to turn out more boots,
or buttons, at a lower price each. He can produce
more, and the cost of production of each wiU be less.
Out of this lowered cost and increased amount
he must be able to put aside a certain amount
every year in order to provide for keeping the
machine in repair and for the repayment of the
loan. When he has done this, and allowed for his
ordinary expenses, he finds that he ought still to have
something over, if all goes weU. Let us say that he
thinks he wiU have about eight to ten per cent. more.
Therefore it wiU pay him to borrow if he can get the
capital for eight or nine per cent, or less, but if he has
to pay more the new machine will not be bought.

In other words, the use of capital in industry is to

88 GETTING AND SPENDING

enable producers to employ methods of production
which result in increased wealth. Such new wealth
may take some time to come into existence, but there
is more of it in the end. Out of the increased pro-
duct must come what has to be paid to the workers,
what the producer himself must have in order to
make it worth his while to go on producing, the
necessary allowances for insurance against risk, the
replacement of the capital itself. What is left, over
and above all this, is available for the payment of
interest.

But will the producer actually have to pay away
all that he could pay, and would indeed be wilHng to
pay in order to have the use of the capital ? This will
depend upon the other party to the affair, that is the
lender. What are the influences which affect lenders?

THE SUPPLY OF CAPITAL

The owner of capital can take one of several courses.
Either he can go into production himself, or he can
lend, or he can use his capital not in production but
to amuse himself. Which he will do will probably
depend upon many things, among others his nation-
ality, his tastes, his habits, whether he looks forward
or thinks of the present. But among the things which
wiU influence him will be the amount he can get for
the use of his capital. A high rate of interest tempts
the most improvident of people to save, and when
interest is very low there are always a certain number
who think it better to enjoy their wealth now than to
save it, when the amount they can get by saving is
so small.

INTEREST 89

There are also a number of people who are deter-
mined to save, for their children, or to provide for their
own old age, or for illness or unemployment, and these
will save whether interest be high or low. Indeed,
we might think that some of them will have to save
more when interest is low than when it is high, that is
if they wish to save enough to bring in a definite income.
It is interesting to speculate about how much of the
savings that are actually made every year are due to
reasons of this kind. However this may be, it seems
true that as the rate of interest rises, the amount of
loanable capital increases, that a high rate does
produce an increased amount.

Now, to return for a moment to the borrowers, it
is probable that at any time there will be enterprises
of varying degrees of productivity needing capital for
development. Some of these, possibly such as are
due to new inventions or discoveries, may seem
likely to be very productive, and the people who
manage them can and will pay a very high rate of
interest, rather than not get the capital they want.
Others can only pay a moderate rate, and will not
borrow unless they can get capital at a low rate. At
any moment there are a number of people wanting to
borrow, and willing to pay varying amounts, and a
number of people wanting to lend. The actual rate
of interest then at any moment must be that at which
all the capital which wiU be lent at that rate can be
borrowed.

Let us suppose the rate is 5 per cent. Every
one who is wiUing to pay 5 per cent, can get
capital. Some would pay more rather than go
without, but no one will pay more if he can get it

90 GETTING AND SPENDING

at 5 per cent. Suppose there are not enough businesses
willing and able to pay 5 per cent, to use up the amount
of capital which owners want to lend. Then the
owners of that part of the capital which has not
yet been borrowed will have to make up their minds
whether they are willing to take less rather than not
lend at all. They think it over and decide that they
will take 4|. There are several people who will
gladly borrow at 4^ who could not come for-
ward as long as the rate was 5. So the available
supply is all used up and all the lenders have
lent.

But meanwhile the people who have paid 5 will
discover that capital was to be had at 4|. This will
make them very unwilling to pay 5, and they wiU
try to make a new arrangement. Moreover, they will
succeed, because the owners know that if their borrowers
repay them, they will not be able to find other
borrowers who wiU pay more than 4^. So that the
actual rate of interest at any moment will always
be that at which all the capital available at that rate
can be used. Those lenders who are unwilling to lend
at the market rate, but want more, will not be able
to lend; those borrowers who cannot afford the
market rate will not be able to borrow.

A high rate of interest may thus be due either to
conditions of great activity and productivity, when
much capital is wanted, and people are able and willing
to pay a good deal for its use, or it may be due to
periods of great scarcity, for instance, to the effects
of war. Similarly a very low rate of interest may be
due to a lack of business, stagnation of trade, when
no one wants any capital, or it may be the result of

INTEREST 91

great productivity which has led to an increase of
wealth and an abundance of loanable capital.

Broadly speaking, there are always two sets of
forces at work, and they bring about a sort of balance.
There are all the forces which lead to a demand for
capital, and all the forces which lead to its accumulation.
The rate of interest at any moment will represent the
level which is at that moment attained. A low rate
of interest, in so far as it tends to check saving, and to
encourage borrowing, sets to work forces which may
lead to a rise in the rate. And similarly a high rate,
which stimulates saving, and acts rather as a check
upon borrowing, sets to work forces which in due time
will tend to lower the rate. Which of these two sets
of forces will in time prove the stronger it is hard to
say Man's skill, and his increasing command over the
powers of nature, with the resulting great increases
of wealth, would in the end seem likely to lower the
rate of interest. But, on the other hand, wars and
other destructive forces help to keep it high.

It is interesting to think out the different causes
of high and low rates of interest. New discoveries,
and the opening up of fresh countries will raise it for
the time being by increasing the demand for loanable
capital. But after a time the result of discoveries
and the development of the new land will have pro-
duced fresh supplies of wealth, increased the amount
of loanable capital, and the rate will fall. A rate
which is low enough to enable production to be carried
on in the best possible way, and yet not so low as to
check the rate of accumulation, is clearly what would
be the best for a community.

WAGES

PAYMENT FOR WORK

Of all economic problems that of the theory of
Wages is at once one of the most difficult, and one of
the most interesting. It is of the greatest interest,
because upon the right understanding of wages largely
depends the Uvelihood of millions and the prosperity
of every one. And it is of the greatest difficulty
because here almost more than anywhere else all the
feelings and passions and prejudices and traditions
and sentiments, not to speak of all the changes in law
and custom, which we can ignore or take for granted
in many economic discussions, have constantly to be
considered.

There are many people who object to the very idea
and the very word. They do not believe that any
person, or body of persons, ought to employ other
people, and pay them wages for the work they do.
And it is true that under the wages system, as indeed
under pretty weU any other system worked by human
beings, subject as they are to human sin and weak-
ness, there has been much trouble and suffering. But,
however we feel about this, we must agree that there
are always a certain number of people, in any society,
who are good workers, but who have not those special
qualities of character which make men or women

good leaders of others, or those quahties of brain which

92

WAGES 93

make people able to direct industrial processes, foresee
the future, plan out complicated economic or business
transactions. Equally, of course, there are people with
remarkable intellectual gifts, whose work may be
of the greatest possible benefit to mankind, but who
are almost unbehevably incompetent with their hands
and as helpless as a child in the affairs of everyday
Ufe.

There is room for all kinds of people in the world,
people who have the gift of direction and hke responsi-
bihty, people who hke regular work and do not want
to think too much, or who would prefer to foUow
rather than to lead. What is of tremendous importance,
if we are all to hve happUy together and make the
most of our hfe in this world, is that people of aU
these differing kinds should do the work, whatever it
be, for which they are reaUy fitted, and not make
themselves and every one else uncomfortable by
being in a position for which they are not reaUy fit,
whether that position is one for which they are, as
people say, too good, or one for which they are not
good enough. And whether the wages system as we
have known it, or some other, is in force, there wiU
probably be people who work, people who direct,
people who plan, people who carry out the plans made
by others, and much trouble will be saved if we can
understand at least broadly what they can expect
to get from the wealth that is produced in return for
the different kinds of functions they perform.

We may not be able to decide exactly what ought
to be the share of the actual workers, indeed it is no
part of our business as economists to do so. But we
can see what is the Hmit above which and below

94 GETTING AND SPENDING

which the share of the worker cannot go, without
injury to production. If we really can understand
that, we shall be in a better position to make up our
nainds, as citizens, about laws or customs which
affect wages. We may in this, as in other economic
questions, think that it is worth while to do some-
thing which means an economic loss for the sake of a
poUtical or social gain. But it is clear that we shall be
better able to judge if we have some idea of what the
economic loss may be, and to what results it may
lead.

In early days this problem would not arise. Our
friends who used flint weapons, or even those who lived
centuries later, would have been their own landlords,
their own capitahsts, their own business managers,
and done their own work. And a hard time in those
days they had, and very Uttle result for all their labours.
Gradually, as time went on, people began to divide
themselves up, and those who had the quaKties,
whatever they may be, which lead men to control the
Uves and work of others, took the lead. Through
war, through trade, in many different ways, there
came to be, as we all know, men who worked by
taking risks and responsibilities, controlling the work
of others, and men who worked for a given wage,
and took none of those responsibiUties.

The development of machinery made this process,
which had gone on slowly through the ages in varying
ways, as our history books tell us, go on a good deal
quicker, and it also seemed to sharpen the distinction
between those who were employed and those who
employed others, pajdng them for the use of their
work. So that the idea worked out by the economists

WAGES 95

is that as the landlord is paid by rent for the use of
his land, the capitalist by interest for the use of his
capital, the labourer or worker is paid by wages for
the use of his work, and the business manager or
employer is the man who uses them all, pays them aJl,
and makes what he can for himself out of it. What
we have now to discover is how the amount paid for
the use of work is determined.

EARLY VIEWS ABOUT WAGES : THE WAGE-FUND THEORY,
THE WORK-FUND THEORY, THE PRODUCT THEORY.

In the middle of the nineteenth century the views
held by thinkers were of a depressing character. They
saw something which was no doubt true, but which
was not the whole of the truth, and the theory of
wages set forth by John Stuart Mill, one of the very
greatest of EngUsh thinkers and economists, is any-
thing but encouraging. Before he died he had changed
it to a great extent, but in his book. The Principles oj
Political Economy, which is one of the classical works
on economics, and very widely read, it is set forth on
the old lines.

Unfortunately, not every one who reads Mill knows
in what directions thought has developed since his
day, and so there are people who believe that his
theory of wages is to be accepted. This has had
unfortunate results, partly by making people think
that it is no use trying to improve conditions as long
as we have wages at aU, and that the only way to
improve is to sweep away the existing system; and
partly by discouraging people who were genuinely

96 GETTING AND SPENDING

anxious to make improvements, and were, or would
have been, able to do so. We should not need to
trouble about it ourselves, for it is no longer accepted
by thinkers, but as it has had so much effect, and has
been so widely known, it is worth while to learn what
it was.

Putting it very shortly, this theory, known as the
Wage Fund Theory, says that wages are paid out of
capital, that at any given moment there is a certain
amount of capital out of which they can be paid and
no more. The result is that if one set of men get
more, another must get less, and a more depressing
notion could hardly exist.

We must think about the conditions of the times in
which MUl lived, and if we do this we shall see that
his views are, as is usually the case, a reflection of
what he actually beheld. There was a great scarcity of
capital, largely due to the immense development of
steam transport, and a good many people wanting work.
The modem organisations with which we are so famihar,
from the great Trades Unions to unemplojonent pay
and labour exchanges, had scarcely come into being.
What capital did exist was badly wanted for such work
as the building of railways and the laying down of
railway lines, and there was something like a shortage
of 'circulating capital' available for the support of
the workers, in other words for the payment of wages.

We can now see that neither of the two statements
which make up the wages fund theory is wholly
true. It is not true, in the first place, that there is
in any country, at any time, a certain amount of
capital which will definitely be used for the payment of
wages. There may be a certain amoimt of capital which

WAGES 97

can be used for the payment of wages, but whether
it will be so used depends upon a number of circum-
stances. Neither is it true that there is in any country
at any time a definite number of workers who must
take work whatever be the rate of wages. We all
know that this statement does not correspond with
facts. But we can weU understand that as long as
those views were held it would be natural for people
to think a great deal about the importance of emigra-
tion, or of the forces which are Ukely to check the
growth of population. The fewer people there were,
the more it seemed there would be for those that
were left. And also those who accepted the wage
fund theory could not but believe that those Trade
Unions which succeeded in getting higher wages for
their members were taking away the share of some one
else. Altogether a depressing idea and one of those
which made people fifty years or so ago talk about
political economy as 'the dismal science.'

Fortunately, we need no longer distress ourselves
by accepting it. But there are, it seems, still many
people who have in their minds a new variation of
this theory. They apparently think, not so much that
there is a certain amount of capital to be divided
up among the workers, but that there is a certain
amount of work to go round, and that the more one
man does the less there will be for every one else.
This view is no nearer the truth than the other,
indeed it is if anything further. Carried out to the
end, it looks as if the less each of us did the more
there would be for every one, which is clearly absurd.
As so often happens, it seems plausible enough, taking
short views, and many people do not get beyond

G.S. G

98 GETTING AND SPENDING

taking short views. But when we come to reason it
out we see the fallacy.

Suppose there is a house to be built. The brick-
layer knows how many bricks will be wanted. He
says (taking the short view), 'If I only lay so many
a day there wiU be work for two or three of us for
three months. If I lay more there will perhaps be only
work for me and one other man for part of the time.'
So he only lays half or a third as many bricks as he
could lay, without tiring himself too much, and this
not in the least from laziness, but from a wish to
divide up work among as many as possible.

What is the result in the long run? If three brick-
layers have to be employed to do the work which
one, or one and a half, could have done, the brick
part of the house wiU cost three times, or twice as
much as it need. Houses will not be cheap. There-
fore people will not be able to afford so much house-
room as they would otherwise have done (or if they
do they will have to go without something else).
The next result will be a diminished demand for
houses. Fewer houses, or smaller and therefore
cheaper houses, will be required. That means in the
long run, and perhaps not so very long a run either,
less work for bricklayers. So that the probable result
of spreading the work out thin in the first place is
less work in the second. Moreover, the rest of the
population suffers from having to pay more than is
really necessary for housing accommodation.

But if we are to accept neither the Wage-Fund Theory
nor the Work-Fund Theory, what can we accept ?

As a reaction from the wage-fund theory, some
economists next proceeded to work out what has been

WAGES 99

known as the Product Theory of wages. They were
partly influenced by conditions prevaihng in the
United States somewhere about the seventies of the
last century. They said : Wages are not paid out of
capital, they are paid out of the product of labour.
For instance, the American farm labourer does not
get a monthly wage, he gets a lump sum at the end
of the harvest; clearly he is paid out of the product
and not out of capital at aU.

As most wages are stiU paid weekly or monthly,
in many cases long before the product has come
into existence, and certainly before it has been
marketed, this view will not do either, and we
need not spend more time over it. Like its
predecessors, it represents one aspect of the truth,
that is that wages do to a great extent depend upon
product, but it does not contain the whole of the
truth. What then does determine the current rate
of wages in any trade at any time?

MODERN VIEWS : DEMAND AND SUPPLY

Wages depend upon the demand for and the supply
of labour, and what we have to discover, if we can,
are the various forces which determine
this demand and supply. (o) Demand

The demand for labour at any time must
clearly be Hmited, as the wage-fund people saw, by the
amount of capital which at that moment can be used
for the employment of labour. But one great difference
between our view and theirs is that while they thought
of this amount of capital as a fund, we think of it

100 GETTING AND SPENDING

rather as a stream, constantly flowing, and not
necessarily of the same size from one moment to
another. What determines the size of the stream?
The efficiency or productivity of labour itself. This
is where the Product Theory people were right; they
saw that the product of labour must be closely con-
nected with the amount which could be paid in wages.
What they forgot was that workers cannot always
wait till the product is obtained, and that therefore
wages must be advanced out of capital.

We are now a good deal further on. We see that
at any moment there is a certain amount of capital
which can be used for the pa5Tnent of wages, that the
size of this amount depends upon the productivity of
past labour, and that whether the whole of it will or
wiU not go to pay wages depends mainly upon how
far labour is expected to be efficient, or productive,
or whatever word we like to use, in the immediate
future. That is, the demand for labour is for the
moment hmited by the wage fund, or better wage
flow, but the size or amount of that flow is the result
of past labour, and its fate, that is whether or not it
will all go to future labour, depends largely upon the
expected productivity of future labour. If bargaining
power between the business manager and his workers
were absolutely equal, the worker would therefore get
the whole of that part of the total production of
wealth which was due to his own efficiency. If he
got more, he would have some part of what was due
to one or other of the other agents of production; if
he got less, it would be because his bargaining power
was unequal to theirs.

Let us put the thing in a rather more definite manner

WAGES loi

by way of illustration. Let us imagine some one who
is going to produce flower pots, or boots, or whatever
we please. The some one is a business man, who is
trained in business methods, and has good business
abilities. He has taken a piece of land, for which
he pays rent. The land is, he thinks, worth what he
is goiiig to pay, it is within easy reach of the railway,
and of the neighbouring small town, where he hopes
to find his workers. He borrows his capital, with it
erects his factory, and puts in the necessary machinery.
For his capital he has to pay interest, and also he must
put aside a certain amount each year to provide for
repairs and for repayment within a given time. Now
he has also to employ labour. How will he decide how
much he shall pay his workers ? (We are still thinking
of this question from the demand side ; we shall come
to the other, the side of supply, in due time.)

We are taking it for granted that he is a good business
man and no fool. The first thing he will feel is that
he must pay his workers the amount, whatever it is,
which is enough to keep them as efficient as they can
possibly be. It cannot pay to put wages below the
point at which the workers are thoroughly efficient.
That will be his downward hmit; below it he will
not go. But if his business is very successful, the
demand for his flower pots or boots good, and his
workers keen, the conditions under which they work
satisfactory, and everything goes well, the result of
their work and his management may be an amount
which, after it has given him enough to make him
feel that it is worth while to go on managing, leaves
something over. That is, the product may be large
enough to pay his workers efficiency wages, to give

102 GETTING AND SPENDING

him the necessary amount of profit to keep him
ef&cient too, and yet there may be something over.

Now who will get that, or in what way will it be
divided between him and his workers ? It is impossible
to say, for the exact division must depend upon many
circumstances. But we can point out the upward
limit beyond which wages cannot go. They cannot
go beyond the point at which the article in question
can go on being not only produced, but sold for a
sum sufficient to cover all the expenses of production.
Suppose the workers are in one way or another enabled
to get the whole of this surplus, that is the amount
which is over when both they and the business manager
have had the sum which is enough to keep them
perfectly efficient, and after rent and interest have
been paid. Nothing wiU happen. But suppose they
are not content, and try to push wages further up still.
Then things will begin to happen.

In the first place, can the extra iimount the
workers want over and above the surplus come off
interest? Not in an ordinary world such as we
know, because the owners of the capital available
can get the amount paid, that is the market rate of
interest, from some one else, if not from our friend,
and at less than the market rate of the moment
he cannot borrow, for they will not lend. Nor can it
come off rent, because if he will not pay the economic
rent some one else will, and why should the owner
let him have the land for less? Can it come out of
his own share, profits? Possibly it might for a little
time, if he thinks he cannot do better elsewhere. But
we have assumed him to be a competent, well-trained
man, and he can get what he needs elsewhere if

WAGES 103

he cannot get it here. In any case if he takes less
than what he needs for long his efficiency will begin to
get less, he will make mistakes, get worried, and be
unable to make up his mind quickly, or in some of
the many possible ways be less efficient.

Then can the increased amount come out of the
buyers, that is, can it go on to price? This again
depends upon a number of var5dng conditions, but
the answer is that in ordinary circumstances it cannot.
For in every business there are many competitors,
some within the country, some in other lands, and if
the price of boots or flower pots or anything else is
forced up in one district, or one factory, or one country,
beyond the current market price, buyers will fall off.
Either they will try to buy elsewhere, or else they
will try to do without. In either case demand will
grow less, and that means that fewer people will be
employed in the business. If the workers require
more for their labour than it is economically worth,
unemployment is bound to follow.

Of course, this does not mean that wages cannot
rise. On the contrary, they can and do, and let us
hope, will. In the first place there is the question of
the amount that is over after all the different agents of
production have been paid what is necessary to make
them as ef&cient as possible. There is often a very
considerable surplus, and upon the bargaining power of
the workers depends how much they get of this.
And then the efiiciency of labour, that is of the
workers, is no more fixed than is the wages fund, on
the contrary it is, and well may be, perpetually in-
creasing. Education, character, all the many factors
of efficiency which we discussed early in this book.

104 GETTING AND SPENDING

can be improved, and the more efficient the workers
in any trade or profession or country become, the
larger is the amount of wealth produced, and the
larger the share of the total available for the payment
of labour.

From the point of view of demand, then, we can
fairly say that wages depend upon the productivity
of labour, that is, in so far as business conditions
prevail, and the bargaining power of all the various
agents of production, which means their knowledge
and their power of moving freely about, are equal.

Now what about supply 1 The supply of labour for
any industry at any particular time means the number
of people who can work at that industry,
(b) Supply. and who are wilUng to do so at the rate
of wages offered. The actual number
must depend upon the population, and whether or
no there are any laws or customs which prevent
any one who wishes to do any special work from
doing that particular work. As most of us know, there
are in some trades rules which Umit the number of
apprentices who may be taken, and this means that
the number of people who can actually work at the
trade because they have been trained for it is Hmited.

Sometimes the supply of workers in any particular
place is accidentally limited by a shortage of houses.
But in the ordinary way that sort of difficulty would
only be temporary, for if a new industry sprang up
in some village or small town, and proved so attractive
that people from other neighbourhoods wanted to
live in that place in order to work in the industry,
the local builders would soon turn to and build

WAGES 105

them houses. And if there were not enough local
builders others would move in from other districts,
and gradually the supply of houses would become
equal to the demand for them.

The apprenticeship rules, too, can always be changed
to suit changing conditions, and if any industry which
had strict rules of apprenticeship discovered that
there were reaUy not enough workers to do the work
required, they would make changes in the rules. So
that, although the number of people who can work
at any trade or profession may be insufficient for a
time, owing to causes of this kind, in a modern world,
where people easily move, the shortage is not likely
to last for very long, that is, not for many years.

But the actual number of people who can work at
any trade or profession is not the only factor in supply.
We must also consider their willingness to do that
kind of work, or to accept the current wage. There
are some kinds of work which are so unattractive
that, although people can make a very good hving out
of them, there are not enough workers to do what is
required. Fortunately there are all sorts of people in
the world, and some like what others hate, so that it
is a very unattractive job which finds no one to do
it. People's tastes, however, change from one
generation to another, and in the last half-century
or so we have seen an increase in the number of people
who apparently do not mind smoke and noise and
dirt and crowds, and do like theatres and cinemas
and the society of many other human beings of varying
types. Perhaps there will be another change by-and-
by, and we shall get the new generation longing for
peace and beauty and quiet and close contact with

io6 GETTING AND SPENDING

nature, and then there will be more people available for
the kinds of work which can be done in the country,
and fewer for the kinds that are done in towns. Just
now there are rather too many, as a rule, available
to do town work, and not quite enough for country
jobs.

Supposing next that there are people who can do
the work, and are willing to do it, we have to consider
whether they will do it at the current rate of pay.
This depends really upon what economists call the
standard of comfort, that is the amount which people
feel they must have, and without which they cannot
get along. If they cannot get it at one sort of work,
or in one place, they will try for other sorts of work,
or move to other places. This does not necessarily
mean that every one will move, but that if any
particular trade cannot, for some reason, pay what
the workers feel is a wage sufficient to maintain their
standard of comfort, new workers wiU not enter the
trade, and the supply wiU steadily diminish. Here
again we must guard ourselves against thinking of
the supply of workers as anything fixed, it, too, is
more like a stream, continually fed by the new young
people growing up and getting to a self-supporting
age, while the older people stop working, retire, or
die.

The standard of comfort is constantly rising, and
the modem workers expect, and rightly expect, a
degree of comfort much beyond that which was
enjoyed by their predecessors. Just now, after the
war, we are all faced with the difficulty of maintaining
anything like the standard of comfort which we had
grown to expect, in a world made infinitely poorer

WAGES 107

because of the destructive forces which have been
at work. Immense numbers of people are living at
a standard far lower than seemed likely before 1914,
and this is much truer of other countries than of our
own. Nothing is so difficult or so impleasant as to
be obliged to lower one's standard of comfort suddenly
and considerably, just as few operations are easier
than to raise it if one has the means.

If the conditions of wages are such, in any industry,
or in any country, that the ordinary standard of
comfort cannot be maintained by the workers, we may
be sure that the supply of labour for that industry
wUl fall off. Then either the industry must cease
to exist, if it caimot pay a wage which the workers
feel to be what they need, or else it must so change
its methods that it becomes able to pay that wage.
It may be changed by an increase in the efficiency of
the workers themselves, or by an improvement in
the methods of management, or by both.

In real Ufe, these two forces, efficiency, which is the
key to wages from the demand side, and standard of
comfort, which is the key from the point of view of
supply, are constantly acting and reacting on one
another. Nothing so stimulates a worker to maintain
and increase efficiency as a high and rising standard
of comfort. And a worker who has a low standard
of comfort is hardly Ukely to be efficient. Every one
can Ulustrate this from experience. Most of us have
known cases of people who had a low standard of
Ufe, and were content to get along in a very inefficient
manner, just earning enough to keep themselves in
the uncomfortable sort of way which was all that
they desired. Then something happened : some new

io8 GETTING AND SPENDING

influence was at work, perhaps a capable wife, or the
prospect of one, who had herself a high standard of
comfort. The inefficient wants to become ef&cient,
and if he wants it enough, he will become efficient.
He keeps time, gives his mind to his job, finds out
how those of his fellows who are the best workers
differ from those who like his former self are the
worst.

Or again, many of us have known people who through
no fault perhaps of their own, but from some physical
weakness, or some want of training, could not earn
enough to make themselves efficient. Somehow the
difficulty is solved, perhaps a surgical apphance,
perhaps a few months in good air, even a change of
climate, or some special training. Once more the
inef&cient has become efficient, and not only the
worker himself, but the whole community, is the better
off, for the ' social debtor ' has become the ' economic
man.'

A high and rising standard of comfort is then likely
to increase efficiency, and increased efficiency is the
only possible way to maintain and increase the stan-
dard of comfort. In the imperfect world in which
we live, things do not always go smoothly in the short
run, and we may find people, owing to some discovery
or invention or change in demand, with a great
increase in earnings, and without a corresponding
increase in the standard of comfort. Unused to the
amount they have at their disposal, they spend it
in ways which do not increase efficiency, and may
diminish it. Or again, some change, possibly in a
far-away land, may make the production of a com-
modity so unprofitable that the industry cannot pay

WAGES 109

the wages necessary to maintain the standard of
comfort of the workers. The result must be a diminu-
tion of efficiency, through no fault of the workers,
and the burden will be borne by those who are unable
to leave the industry and to find fresh work at a
suf&cient wage.

Changes of this kind mean the existence of social
and political problems with which statesmen must
deal, and about which citizens must think. But their
thoughts are hkely to be more effective if they see
the problem in all its bearings, economic and other-
wise, and attempt to solve it perhaps by working
along rather than against what seem to be the hues
of economic development and the increase of produc-
tivity.

We can find an obvious illustration in the rapid
development of motors, which meant difficulties to
the older men such as grooms and coachmen, who
had spent their lives among horses, knew everything
there was to be known about them, and did not take
kindly to the care of machines instead of the manage-
ment of animals. The younger men could learn, the
boys took up motor driving when they entered life,
instead of going into the stable. But it was hard on
the older people. Yet motors have been, on the whole,
a great benefit to mankind, and any plan which had
checked their production for the sake of those who
were interested only in horses would have meant an
injury to mankind as a whole, apart from grooms,
coachmen, and the breeders of horses, and probably a
check to productivity and the increase of wealth.
It is the business of the economist to make clear the
workings of economic forces, it is the business of

no GETTING AND SPENDING

statesmen, and of the ordinary citizens by whose views
statesmen must be guided, to smooth over the diffi-
culties which progress or change may bring.

WOMEN S WAGES

It is worth while to spend a little time in thinking
over the question of women's wages, partly because it
is a very good illustration of the theory, but also
because it is one which is important in itself, and may
become more important. The number of women who
are wage-earners has gone on increasing, and during
the war, as every one knows, it increased very rapidly.
Women's earnings have tended to be less than men's.
Is it because they are less efficient, or because the
supply is greater than the demand, or why?

In the first place, the ways in which women could
earn were, and are still, very much fewer than those
open to men. For a long while custom or prejudice
confined the work of women to certain well-worn
channels. The experience of the war proved that
they could, if they were permitted, do a good deal of
work that had hitherto been performed by men,
and do it, especially when allowance was made for
their want of training, with a considerable degree
of efficiency. As a result of this experience, the legal
barriers which had kept women out of certain fields
of work were removed, and in law now the chances
of men and women are equal. In fact, however, this
is not so, and women are still kept, by custom or
prejudice or trade regulation, out of certain trades
or branches of trades.

WAGES III

The result of the smaller number of openings avail-
able for women was that those that existed were
very much overcrowded. Supply was much in excess
of demand, and wages were as a result often very
low indeed. This in turn affected efficiency, and
sometimes the women who could earn very Httle were
as a result not worth very much. It is what people
are fond of calling a vicious circle : earnings were low
because efficiency was small, and efficiency was small
because earnings were low. This was especially the
case in those industries which were by custom con-
sidered specially appropriate to women, and into
which women consequently crowded in great
numbers.

In the war years the number of openings for women
was greatly increased. There were scarcely enough
women to meet the demand for women's labour
instead of their numbers being greatly in excess of
demand. Wages rose, and with the increase in wages
came an increase in efficiency. Over and over again
it was found that women, who had never before earned
enough to keep themselves properly fed or to buy good
strong boots, became enormously more efficient when
they were well fed and well clothed. Once more
people who had been almost if not quite "social
debtors ' became ' economic men ' to the advantage of
everybody.

One difficulty in keeping up women's wages, ini
addition to the restrictions upon the industries at
which they can work, is that they have without doubt
a lower standard of comfort than men. The ordinary
man takes it for granted that he will and must earn
enough not only to feed and clothe himself, but to go

112 GETTING AND SPENDING

at least part of the way towards supporting some
woman who will cook and wash and mend and clean
for him. The ordinary woman takes it equally for
granted that she will do aU or nearly all these things,
for herself, as well as do the work by which she earns
her living. The result is that as, properly speaking,
both home-keeping and industrial work are full time
jobs, she does not do either of them very well, and
her efficiency as a wage-earner is diminished.

She is, shall we say, too tired to cook for herself
when she comes home, or if she is not too tired she wants
to spend her leisure in a more amusing way, and the
result is that she is undernourished and inefficient.
A woman who works ought, just as much as a man
who works, to earn enough to pay some one else to
cook and clean and wash for her, if she is to be as
ef&cient as she is capable of being. But it looks as
if it would be some time yet before women, or men
either, quite thought this. Man takes it for granted
that some woman will look after him, woman takes it
for granted that she will look after herself. It is a very
clear illustration of the way the standard of comfort
and efi&ciency act and react upon one another.

It is also true that men assume that sooner or later
they will need to earn enough not only to provide for
the woman who makes them comfortable at home,
whether she be wife, mother, or landlady, but also to
maintain children until they reach an age at which
they can maintain themselves. And although many
women have dependents, and many men have none,
as things are at present, though no one is rash enough
to say how they may change, the standard of comfort
which, from the point of view of supply, determines

WAGES 113

the man's earnings is one which takes for granted the
existence of children whose father will support
them.

There is still another reason for the low level of
women's wages, and that is that many of the women
who work are not whoUy dependent upon their
earnings. They are partly supported by some man,
father or husband. Consequently they are wiUing to
take less than is really enough to support them, and
this means that those other women who have to
provide for themselves entirely are far below efficiency
level, for they cannot, especially in view of the over-
crowded state of most of the trades open to women,
get more than the partly supported women do, and
thus what they earn is wholly insufficient.

The remedy for this, from the economic point of
view, is not to forbid those women who are not entirely
dependent upon their earnings to work, for from the
point of view of production the more people who
are producing, the more wealth there will be to dis-
tribute. Rather is it that women should come to
understand what effect their willingness to take what
are sometimes called "pocket-money wages' have
upon the other women who are entirely self-supporting;
so that they will not work unless they can obtain a
sum sufficient to maintain the standard of comfort.
The competition of wage-earners who are not wholly
dependent upon their earnings, and who do not
understand the effect of their action upon others,
almost always tends to keep wages down.

Here again it is not for the economist to advise,
but it is for him to point out the bad effects, economi-
cally, of the existence of people whose efficiency is

G.S. H

114 GETTING AND SPENDING

much less than it is capable of being. The opening
up of new forms of employment, so that the older are
less overcrowded, the raising of the standard of
comfort, and the increase, by better training or other-
wise, of ef&ciency, will not only improve the condition
of the women workers themselves, but of the whole
community as well.

PROFITS

WHAT DETERMINES THE RATE OF PROFITS

We have already come across a number of words
which we use in ordinary conversation to mean several
different things, and which in economics have a strict
and precise meaning. Profits is one of the worst of
these tiresome words, for while it means all sorts of
things in everyday life, it has not always been used
in exactly the same way even by economists. The
earher writers included interest in profits, and we still
need some word to describe what may be over after
aU the agents of production have been paid. That is,
after rent, interest, wages, and the earnings of manage-
ment have been met, there is sometimes a surplus
which is available for division, and which will probably
be divided between the wage-earners and the managers
according to the strength of their respective bargaining
power.

Some people call this surplus profits, but the more
ordinary use of the word, and the one we will adopt,
is that profits are the payment to the business manager
for the use of his business abihty, his powers of
organisation. We wiU not include interest, as did the
earher people, who were accustomed to think of
business which was managed by people who owned
the capital employed, and who were therefore capitaUsts
as well as business managers. Nowadays, although

"5

ii6 GETTING AND SPENDING

this still happens, many businesses are run entirely
or very largely upon borrowed capital, for which
interest is paid, and it is therefore much easier to
work out the forces which determine how much the
actual business manager will get.

His profits wiU clearly depend upon the difference
between the price at which he can sell his goods, and
what it will cost him to produce those goods, when he
has paid all his expenses, his rent and interest, his
workers, his insurance, and the cost of his raw material,
and has put aside what is necessary for repairs, deprecia-
tion, and repayment of capital. Now the price at
which he can sell will be for the moment fixed by the
competition of all the other producers of the same
commodity, and the state of the demand for it, and
he will make his calculations upon this basis.

The problem for him is how he can reduce his
expenses of production. He can do this in several
ways.

In the first place, there is the purchase of the raw
material. A very great deal may depend upon the
buyers employed for this purpose. If it is bought at
the right moment, and in large quantities, much may
be saved. The incompetent manager buys from hand
to mouth, tries to save perhaps by buying cheap lots,
which may turn out very bad bargains, and probably
refuses to employ expert buyers, who would really
save him large sums by their special skiU and know-
ledge. The skilled manager avoids all these mistakes.

Then there wiU be the question of selling. The
skilled manager will have that special knowledge of
markets, of when and how to sell, which seems almost
to amount to an extra sense. And again he will know

PROFITS 117

how much it is worth while to spend upon the employ-
ment of good selling agents, or buyers. There is an
old but true pre-war story which illustrates this. Once
two sellers of ready-made ties, one English and the
other belonging to another race, met, let us say, in
Sweden. Now it happens that the Swedish custom
is to fasten these ties upon one side, while in England
they fasten upon the other. The English ties were
far superior in design and material, but the Swedish
hosiers would not give orders for them unless this
little trouble in fastening could be got over. The
other man at once quoted prices for ties made to
fasten in the Swedish manner. The EngHshman said,
'If they won't fasten their ties in the right way let
them do without.' It is obvious who got the orders.
So that here the manufacturer had produced admirable
ties, but he failed to sell them because of the incom-
petence of his traveller. The moral is that much may
depend upon the skUl of the agents employed to
market the produce.

But perhaps most of all the skilful business manager
can show his ability in the matter of his workers.
The stupid man will once more practise false economies
in Hghting and heating his workshops, in his organisa-
tion of work, in his arrangement of machines. For
want of enough hght work will be spoilt, for want
of good ventilation, enough breaks in working hours,
convenient arrangements for meals, the workers will
be far less efficient than they might be if all the
conditions were good. Bad air, cold, poor light, long
hours, aU make people fumble-fingered and likely to
make mistakes and spoil material.

The skilled employer, on the other hand, will know

ii8 GETTING AND SPENDING

that capital spent upon providing really good con-
ditions for workers wUl repay itself over and over
again. He wiU watch and observe, he will know how
long at a stretch his workers can work without beginning
to get tired, and he will see that they stop short of
that point. Then, too, he will understand that low
wages spell inefficiency, and that cheap labour is often
far too dear. In modem conditions the actual amount
paid may indeed be fixed by the Trade Union and be
the same for aU employers, but nevertheless there is
great scope for skill in management in this matter.

Nothing is so characteristic of what we might call
the marginal employer, that is some one like the stupid
man we have described, as an attempt to keep down
wages to the lowest possible level. The result of low
wages and bad conditions is that only the least
efficient of the workers are likely to be wilhng to take
the work : the better will have gone to factories
run on more satisfactory lines. So that the marginal
employer is often, indeed usually, managing the work
of marginal workers, and the result is not likely to be
highly productive.

There are many other ways in which the employer's
skill can be shown, in his development of new markets,
in his knowledge of the course of trade, in his watch
for new and improved methods and new or improved
machines, and in much else which it is not necessary
to discuss at length. The marginal employer generally
holds the view that what was good enough for his
father is good enough for him, and that why people
want aU these new-fangled ideas he is sure he cannot
imagine. It is not only the marginal employer, by
the way, who feels hke this, but a good many other

PROFITS 119

people who are also rather marginal from the point of
view of the conamunity. The skilled man will feel
that if it was good enough for his father it cannot
possibly be good enough for him, and he will keep an
open mind, and a desire to profit by all the discoveries
of science, and to employ the best educated people he
can find for those parts of his work which need
reflection, observation, and the power of thought.

We need not develop this, but we ought now to be
able to see how mistaken it is to suppose that high
profits need mean either low wages or high prices.
If we foUow a little further the careers of our two im-
aginary friends, the marginal employer and the highly-
skilled man, we shaU see that, while selling prices
are the same for both, one will produce a few articles,
at a high cost of production, the other many at a low
cost. In course of time the highly-skilled man, with
his cheap raw material, his well-equipped workshops,
his highly efficient workers, may find that it would
reaUy pay him to lower the price at which he sells
his commodity. It will make him unpopular with
his less competent fellow producers, no doubt, but
perhaps his new-fangled ways have already had that
effect, and he does not mind. The effect of his action
will be, however, that the marginal employer, who
only made just enough profit to keep going, can no
longer survive. He is obhged to give up, find another
way of earning his Uving, and as it is clear that from
the point of view of the community as a whole he is
not really suitable for the business of emplo5dng, we
need not regret his departure. High profits, when
they result from a high degree of skill, may, and
often do, mean low prices and high wages.

120 GETTING AND SPENDING

In real life there are a number of other things to
allow for, of which luck, sheer luck, is not the least.
But from the point of view of production, the making
of high profits may be a good and not a bad thing,
if it is the result of real skill. It is always worth
while to pay high for the use of exceptional ability.
If we will not pay for it we may lose its use, to our
loss if to some one else's gain. Abnormally high prices
over a whole industry may suggest something wrong in
distribution: high profits made by certain individuals
suggest remarkable ability, from which every one may
benefit.

In real fife, the business manager may be employed
by the owners of the capital, and paid a salary. In
that case true profits would be {a) his salary; and (6)
anything over and above that, which was due to his
abiUty, after all the other charges on the business
had been met. In cases of salaried managers, the
amounts of their salaries will depend upon the demand
for and the supply of managers of the standard of
ability required. It does not seem probable that the
salary will often fall much below something very like
what the man in question could have earned for
himself if he had borrowed capital and gone into
business on his own account, because if much less were
offered him, into business on his own account he would
go. So that once more here we are first at demand and
supply, and ultimately at ability or eflftciency or
productivity, whichever word we Uke best.

On the other hand, the cautious may prefer to
work at a salary rather than go into business for
himself, even if the salary offered is a shade less than
what he believes he could earn. For being a business

PROFITS 121

manager, however great its attractions, is an adven-
turous affair. Every one else lias to be paid before
the manager gets his share, and if there happens by
ill chance to be nothing left over, none of the others
are likely to give up their shares or any part of them
to him. His rent must be paid, so must his interest,
and the wages of his workers ; his is what people call
the residual share.

And it is always possible that causes entirely
beyond his control may reduce that share to nothing.
An earthquake in China means a great falling off of
the Chinese demand for cotton. War in the Near East
may stimulate the production and sale of guns or
ammunition, but entirely do away with that for
something else. Fortunes made in a war have many
a time vanished altogether in the slump after the war
is over. So that those who make profits must always
face the risk of there being no profits to be made,
and consequently they may make more than seems
enough to maintain them in fuU efi&ciency one year,
or for several years, knowing that in the next period
they may have aU they can do to hold on and pay
their way and will get no profits at all.

EXPERIMENTS IN DISTRIBUTION

PROFIT-SHARING AND CO-OPERATION

A NUMBER of attempts have been made to settle
the questions which arise between employer and
employed. Up to a certain point the interests of these
two are, or ought to be, the same. The employer
wants his workers to be as ef&cient as possible, and
ought therefore to be ready to pay good wages; the
workers want as good organisation as possible, and
ought to be glad to see high profits. Nevertheless
there is, as we aU know well, a lack of agreement
from time to time as to how high these wages and
profits should be, and whether one side or the
other is getting more than its fair share of what is
produced.

The principle of profit-sharing has been tried by a
number of businesses, here and in other countries.
The plan is that there should be a standard rate of
wages, a standard rate of interest upon capital (to
include allowances for depreciation and risk), and
a fixed amount for management. Any surplus that
may exist after these payments are made is divided
between management and workers, or management,
workers, and shareholders, according to an agreed
rate, and there is usually a plan by which part of what
the workers get is paid in the form of shares in the
capital of the business. That is, the workers become

122

EXPERIMENTS IN DISTRIBUTION 123

shareholders, get interest upon their shares, and are
capitalists as well as workers.

The advantages of this plan are that friction is
avoided, once the arrangement is made that both the
workers and the management are equally interested
in getting the best possible result, the greatest possible
output. The better this is, the more there wUl be to
divide between them. The difficulty is that, as is
usually the way in this world, the industrious and
efficient only get the same share of the whole as do
the lazy, though they have done more to produce that
whole. But it is also true that the industrious and
efficient, knowing this to be the case, wiU probably
take pretty good care that the lazy are not lazy, and
do their fair share of the work.

Another difficulty is that if there should happen to
be a loss instead of a profit, it is difficult to see who
wiU bear it. Under ordinary conditions the extra
profits of good years weigh against the losses of bad
times. However, the system has worked remarkably
well in some instances for a very long time, and has
led to prosperity and contentment. It is not, how-
ever, approved by some of those who have influence
with the workers, and perhaps for this among other
reasons has not spread as much as was once hoped.

Oo-operation is another plan. Here the idea is to
use the brains, organising capacity and capital of the
workers themselves, and thus to do away with the
employer and the capitaUst. In the case of productive
co-operation (that is actually making goods) each
worker contributes a certain amount of the capital,
on which he is paid interest. The management is
done partly by a paid manager, and partly by a

124 GETTING AND SPENDING

committee of the workers. After the standard rate
of wages, the salary of the manager, and interest on
the capital has been paid, the surplus is divided
among the workers, who thus get what profits, or
surplus, there may be, whether it is due to the
organising skill of the committee, or to general trade
conditions.

In distributive co-operation (the stores famiUar to
most of us, which sell, that is distribute, groceries,
boots, and other needs of daily hfe), the capital is
provided, not by the workers, but by those who buy
the goods. Each member must pay in a certain
amount on joining the society, and anything he may get
in dividend on his pm'chases is kept back until he
holds a certain amount of capital. Here the extra
profits, or surplus, after wages, interest, and salary
of managers is paid, is divided among the purchasers
in proportion to their purchases, and the managing
committee is elected from and by them. The co-
operative stores are themselves members of the great
co-operative-productive bodies (the Co-operative
Wholesale Societies), and thus the two sides of the
co-operative movement are closely linked up.

There are other co-operative organisations which
deal especially with agriculture, and in some countries
there are all sorts of co-operative bodies, from dairies
to banks.

The co-operative movement is without doubt one of
the most living and real in industrial life. Out of the
surplus, sums are put aside for educational and social
purposes, and the whole movement is growing in
many directions. There is an immense body of
co-operators, and a deep devotion to the co-operative

EXPERIMENTS IN DISTRIBUTION 125

ideals. From the economists' point of view it may be
said to use what otherwise might be lost, the organising
skiU of the mass of the people, through their com-
mittees. Probably also it uses capital which would
otherwise be hoarded or spent unproductively. There
are still certain difficulties to overcome. One is the
unwillingness of many committees to pay salaries
which attract really good brains to managing, and
this weakness is only partly made up for by the help
of the committees.

Again, it is not easy to see how far the co-operative
plan would succeed in the complicated business of
producing for foreign markets, with their perpetually
changing demands, which need great skill and elasticity
in management. In producing for a steady demand
and the home market real success has been attained.
The difficulties between employers and employed are
not entirely solved. Disputes about wages and con-
ditions of employment arise and have to be settled
between the workers and the co-operative committees
who employ them, and strikes occur from time to
time much as they do in ordinary trades. But despite
all difficulties the co-operative idea is becoming more
and more widely understood, and in so far as it
succeeds must be using productively what might
otherwise be wasted, the brains and capital of the
ordinary man and woman.

TRADE UNIONS

Trade Unions are not, properly speaking, an
attempt to solve the question of distribution. They
came into existence rather to strengthen the bargaining

126 GETTING AND SPENDING

power of the worker as against the employer, so that
both shall meet upon an equal basis. Organised labour
can obtain conditions which might be impossible to
a number of separate individuals, each making his
own terms. From the economic point of view it is
clear that the fixing of a standard rate of wages ought
to mean the fixing also of a standard rate of efficiency,
for unless there were a very great shortage of workers,
and then only for a time, clearly no employer could pay
a man the standard rate unless he were worth that
rate. Consequently the worker must make himself
worth that rate, or he cannot get emplo3Tnent.

The obvious but probably inevitable result of the
fixed rate is that those who can only work part-time,
the old perhaps, or the weak, cannot be employed.
This diSiculty is specially pressing just now, because
of the existence of many men rendered unable by their
sufferings in the war to earn the full rate, but able to
earn something. It is waste to keep them idle, when
they can produce, and wish to produce, but they cannot
earn the full standard rate. The difficulty is one which
can be got over, but it must arise when a fixed and
inelastic rate is thought necessary in order to maintain
wages at a certain level.

With the pohtical developments of Trade Unionism
the economist is only indirectly concerned, but the
growth of Trade Unionism, and the power of the
great Unions, is one of the most interesting and
important chapters in the economic history of the
nineteenth and twentieth centuries. Apart from
determining the rates of wages. Trade Unions carry
out an immense amount of work for their members.
They pay him sickness allowances when he is ill.

EXPERIMENTS IN DISTRIBUTION 127

and unemployment allowances when he is out of
work, travelling allowances when he is moving from
one place to another in search of work, and help him
in all sorts of ways. Various other plans are being
and have been tried. The idea of all of them is
first to ensure a sufficient wage and profit to make
production as efficient as possible, and next to divide
any surplus that may arise not only by the 'pull of
the market ' but rather by peaceful and friendly
discussions between employers and employed.

SOCIALISM

Finally, we must deal with the idea of what is
called Socialism, a vague word which is used to mean
a number of different plans. The main idea is always
the same, though the working out changes. SociaUsts
want a complete change in the underlying motive,
the mainspring of economic society. Hitherto this
has been the desire of most people to have as much
as they can get, and this desire is only checked by
their wish not to do a very great deal of work.
Most people want to do some work, but not very
much, and if it were not for their wish to have
rather more comforts than they possess, or to be
sure that their children have them, the wealth of the
world would scarcely increase.

Putting it shortly, men work for reasons of private
or self-interest, for the sake of themselves or those
dear to them. It is believed by many that other
motives would produce better results. Self-interest,
they say, has led to great production, but not to very
satisfactory distribution, and even production has not

128 GETTING AND SPENDING

been as great as it might be because it has been
checked by the feeUng that some one is getting more
than his fair share of the product. All sorts of different
schemes have been suggested by which the state
shoidd own land and capital and manage employment.
Since the war, when the state did a great deal of
managing, and most people disUked its management
extremely, other plans have been more popular.
The idea at the bottom of them all is the same, that
people will work better, and that a fairer distribution
of wealth can be obtained, if the work is not done for
individual employers but for the community as a whole.

As a matter of fact, there are now very many people
who work for the community, every one in the
post office, for example, or any one who is employed
by a town or county council, and it cannot honestly
be said that they are more productive and ef&cient
than those who work for private firms. This may be
due to imperfect education, but it is possible that
with better education the present system could be
considerably improved.

The economist must, as far as he is able, look upon
all these schemes with an impartial eye, and try to
discover what their economic results would be. He
sees that self-interest has certainly led to immense
improvements in production, that distribution is still
very imperfect, but that it is improving, and that
there is a tendency towards greater equality. Some
of the rich may be getting richer, but without doubt
so too are the mass of those who were the poor.

The war has interrupted everything, and made all
tendencies difficult to observe, besides terribly dimin-
ishing the amount of wealth that can be distributed

EXPERIMENTS IN DISTRIBUTION 129

at all. The economist sees, on the one hand, the
undoubted difficulty of getting good results from an
unpopular system of production, and on the other
the equally certain difficulty of organising upon other
lines production for foreign markets, and of living in
a world which is managed upon the basis of competition
and self-interest. A small simple commimity, which
mostly produces what it needs for itself, can do many
things which are impossible, or at least very difficult,
for an enormous modern nation living in the modern
world of buying and selling, of exchange all over the
world, of dependence upon foreign markets not only
for what is sold but for what is bought.

His business, however, is to examine the various
schemes, to point out, as far as he is able, their advan-
tages and disadvantages, and to leave others to use
these results and to weigh them against those which are
not purely economic, but social and political. And the
student of economics or of politics will find much to
interest him in the ways by which man has tried to
prevent the crude forces of competition and self-interest
from harming the weak, while at the same time the
desire to gain wealth is not checked. There is a
general agreement that some interference is necessary :
in this country we have, for example. Factory Acts,
Trades Boards, and other legislation. How far the
state can and should, in the interests of the community
as a whole, restrict the activities of employers and
employed, or any other section of society, is one of the
largest and most difficult, as well as most interesting
of the questions which students, citizens, and states-
men must aU consider.

G.S.

SUMMARY

Dividing, then, those who share the total product,
the whole amount of wealth produced in any given
period, into four classes, we have discovered the main
principles which determine how much each of them
can get, in the world organised, as it is now, mainly
on competitive principles; supposing that they are all
equally able to move about, equally able to have a
full knowledge of the conditions of the market, and
are of equal bargaining power. In real life none of
these conditions may be altogether true, though it
is probable that most of them very largely prevail
over a great part of the economic world.

It is no affair of the economic student, as such, to
consider whether any or all of these pa5Tnents, rent,
interest, wages, and profits, are right or wrong. It
is his business to know how and why they are as they
are, and to be able to reason for himself about the
economic effect of changes. From the point of view
of the production of wealth he can say something
like this.

It is best (that is, most likely to increase production)

not only for individuals but for the community as

a whole, that the owner of land should get just so

much rent as is sufficient to induce him to manage

his land in the best possible way, and to see that it is

made to produce as much as possible. It is again

best that interest should be at a rate which induces

130

SUMMARY 131

the greatest amount of saving, while at the same time
ensuring to industry a steady flow of capital at a
moderate price. The workers, if they are to be as
efficient as possible, should receive wages which enable
them to maintain that efficiency, and support their
families according to the standard of comfort which
is required by that degree of efficiency. And lastly
the reward of the manager or organiser, the man who
puts all this vast machine into operation, should be
sufficient to induce him to put his whole energy into
business, and should, too, be sufficient to attract people
of the very best brains and ability.

None of these conditions is exactly fulfilled in
most communities, partly because so few people,
comparatively, recognise their importance. Energy
and ability are wasted in disputes which might go
into production, and the discouragement of ability
means the continued existence of marginal employers
pajdng marginal wages to their workers. And again,
the existence of large masses of cheap and probably
therefore not efficient labour tempts into existence,
and keeps in existence, the marginal employer who
has not enough brains, or enough energy, to provide
the conditions under which high wages are worth
paying. Moreover, every now and then, in some places
or some industries, for varying reasons, productivity
becomes so low that those wages are not earned,
and then employment falls off and distress follows.
Distrust, discontent, insecurity, a feeling that some
one else, whether he be wage-earner or landlord or
employer or capitalist, is getting more than his fair
share, all these are conditions which make for the
opposite of productivity.

132 GETTING AND SPENDING

And until some efficient plan for dealing with
unemployment has been worked out, unemployment,
and the fear of unemployment, is one of the greatest
possible hindrances to production. If every one did
get just as much as was enough to keep him as pro-
ductive as he could possibly be, and there was no
more than that to be divided, the problem would be
comparatively simple, though we have not in actual
fact arrived even at that point yet.

But what happens is that there is often a
surplus, after the agents of production have each been
paid, a surplus which may be due to the combined
skill of all of them, or of that of any two or three.
Or it may be due to sheer luck or the way things
happen. For example, no one can suppose that the
amount the owner of a piece of land in the middle
of New York, or in the City of London, can get for
his land, is only the amount necessary in order to
induce him to make the best use of that land. There
is obviously a surplus due to the accident of New
York, or London, being where it is and what it is.
And over this sort of surplus it is very easy to quarrel,
and to spend so much feeling in the quarrel that
valuable energy is distracted from production. Quite
possibly it ought to be so distracted, social inequalities
and accidents demand thought and time, but never-
theless the economist is bound to point out that while
people are discussing how to remove inequalities they
may easily be diminishing the amount that will next
have to be divided.

Again, from the point of view of production, so
long as the employer and the workers both get enough
to enable them to produce as much as they are able

SUMMARY 133

to do, no more is necessary. But actually there is,
from time to time, a surplus over and above this,
and there is no economic principle to determine how
it should be divided.

Perhaps all that the economist can say, before he
makes his bow and leaves these matters to statesmen,
is something like this. From the point of view of
production, which means from the point of view of
assuring first the necessaries and then the comforts
of civilisation to as large a number of people as possible,
the great essential is that there should always be an
excess of production over consumption. Probably
something like one-fifth of what is produced each
year or in any given period, perhaps even more, is
needed for replacement of capital, for improvements,
and for maintenance. Only when there is plenty
of available capital is it possible for improvements
and developments, and the betterment of mankind,
to have their full chance. So that after all the
requirements of efficiency have been met, if there
is a surplus, it is to be hoped that it will fall into
those hands which will direct it to further production,
either directly, by saving and investing, or indirectly,
by the endowment of research and education. Whose
those hands will be no one can say, and further than
this it is difficult for us to go. But a clear understanding
of the economic principles which underlie the distri-
bution of wealth is a very great help to improving
that distribution, in a manner which will not mean
the diminution of the total available amount.

EXCHANGE

VALUE AND PRICE

CAUSES OF VALUE

In early society there is no question of exchange.
Each person, or group of persons, produces what is
required for themselves, or rather, as much of what
they want as they are able to obtain. But as soon as
there is a division of workers, some doing one thing
and some another, there must be exchange, and thus
arises the problem of what determines the value of
any particular thing. That is, suppose one man or
one tribe has more than he or they need of one kind
of produce than another, while the second in turn
has a surplus of something else, what determines the
quantities in which the two shall be exchanged?

It is clear that in every exchange there are two sets
of feehngs to be considered; first, there is the person who
has something he wishes to dispose of, and secondly,
the other person, who wants the something.

At this point it will be well to define price. Price is
value expressed in terms of some one thing which is
called money. It does not matter what the one thing is,
as we shall see when we get to Money, but it is obviously
convenient to have some one thing to measure aU the
others against. Imagine the endless bother of measur-
ing cows against honey or boots or horses. Man has
got over that difl&culty by the invention of money.

134

VALUE AND PRICE 135

If the farmer wants to sell a cow, and the bootmaker
wants one, the farmer need not go off with boots
enough to last him for years : he can take money,
and with the money buy boots and anything else
he wishes. But for the moment we need not think
much about money, so long as we remember that price
is the ordinary and convenient way of describing value.

Now we saw at the beginning that in order to be
valuable, a commodity must have certain qualities.
It must be wanted by some one, and the some one
must be unable to get it for nothing. Sunshine has
no economic value, we cannot buy it and sell it. But
mutton has, people want it as they want sunshine,
but it is not a free gift of nature, at all events in this
part of the world. If we would have mutton for
dinner we must be prepared to give something in
exchange. In other words, it has value.

Anything which has value, then, wiU be wanted or
demanded, as the economists say, and it cannot be
had for nothing. The supply is not unhmited. The
value of a thing may and does change with changing
tastes, and things which have value at one time
may have none at another. If we were all colour-bhnd
a large number of things would undergo a very con-
siderable fall in value. What, for instance, would be
the seUing price of the pictures in the National
Gallery? Changes in fashion bring changes in value,
so do new discoveries and new habits of life.

SUPPLY

We can divide things into several groups, according
to the circumstances which decide their value.

136 GETTING AND SPENDING

There are some things of which the supply is
absolutely limited, obvious examples are the first
edition of a book, or a picture by an artist who is
no longer Hving, or furniture made at a certain time.
The value of things of this kind wiU depend entirely
upon how many people want them, and how much
they want them; as economists say, by the intensity
of the demand. Pictures by certain artists sell for
fabulous sums because people want them so much,
and if a thing is scarce enough and if people want it
very badly, its value may rise extremely high.

There seems indeed only one obvious hmitation,
apart from the fact that no one, or no group, has
unhmited wealth, and that is that when things are
very dear it becomes worth whUe to imitate them,
and to do it so well that although the very best experts
will not be deceived, other people will, and their
demand will be satisfied by the possession of the
imitation, and wiU not remain to compete with that
of the expert. The making of sham old furniture
is a well-recognised trade, which demands a good deal
of skill, and no doubt results in making many people
happy in the possession of what they believe to be
genuine old furniture, while those who have the
real thing have perhaps had to pay less for it than
they would have done had it not been for the skill
of the forgers.

The second group contains things of which the
supply is unlimited but of which the price, owing to
the working of the law of diminishing returns, increases
with every increase in demand. The obvious example
here is most kinds of agricultural produce. The price
of potatoes (let us say) is fixed by the expenses

VALUE AND PRICE 137

of production of the last sack of potatoes which will
be grown in response to the demand for potatoes at
that moment, that is the expenses of production on
the least favourable piece of land upon which the
conditions of demand for potatoes make it worth
while to grow them. How keen the demand for potatoes
is will depend upon the price, and also upon the habits
and tastes of people, and upon whether there is any-
thing else which can be used if potatoes become
dear. But at any moment the price cannot fall below
the expenses of production upon the least favourable
land, for if it does fewer potatoes will be grown and
some one will have to go without. Nor can it go
above that amount, for if it did more potatoes would
be grown and some grower would find himself unable
to dispose of his supply.

The third class of commodities is that of which
there is any amount, again, to be had, but of which
the more that is wanted the cheaper they get, because
they can be produced more cheaply in large quantities
than in small. Most manufactured goods have this
pleasant quality, and are therefore said to be pro-
duced subject to the law of increasing returns. It is
easy to understand. Let us take printing for an
example. Many of us know that if we want to get a
notice printed, of a concert perhaps, or of something
we have lost, the first question is how many copies
we shall want. If we need only a few they will cost
a good deal each, and the price for each notice will
be less the more we have. For the main expense
comes in setting up the type; after that is done the
mere rolUng off of copies is not much trouble, and
the more the initial expense of setting up the type

138 GETTING AND SPENDING

can be spread out, the cheaper will be each
copy.

Clearly the more work that can be got out of each
machine the better, and the more thinly, so to speak,
can be spread the cost of the machine. So that in
things of this kind the price will again be determined
by expenses of production, and what those expenses
of production are wiU depend on the demand. If the
demand is great, the expenses will be low; if the
demand is slight, the expenses wiU be high.

Lastly, there are said to be commodities of which
any quantity can be produced, and of which the
expenses of production will remain the same whether
few or many are needed. It is not easy to think of
examples of things produced thus under the law of
constant returns, but we can imagine some of which
the raw material is produced under the law of diminish-
ing returns, while they are manufactured under the
law of increasing returns, so that the one just cancels
the other. It also seems possible that hand-made
goods would to some extent come under this law.
After a certain degree of skill has been reached, and
provided that the worker does not go on after fatigue
has diminished the pace of working, each pair of
hand-knitted socks, or each thousand words typed,
shall we say, cost the maker just about the same.

MONOPOLY

There are certain exceptional cases which cannot
be made to fit properly under any of these rules, and
the most important of these are things which are
produced subject to conditions of monopoly. That

VALUE AND PRICE 139

Is, the supply is not produced under conditions of
competition, but is controlled by one person or one
group of persons. There may be natural monopolies,
or artificial monopolies. The water supply of a town
which has no wells, but is obliged to have its water
brought from outside, is a natural monopoly, because
there is only room for one set of water pipes in the
ordinary street. Or we might think of something
which grows only in one particular place. A mineral
spring with special qualities unhke those of any other
spring is an example.

Artificial monopolies are much more familiar.
They may be the result of laws, or of the combination
of all the people who produce the article in question,
and we became familiar with them during the war,
when governments were obliged to 'control' and to
buy up the whole supply of something, for instance
sugar, in order to make sure that people should have
it, and that it should be fairly distributed. In the
case of controlled articles governments regulated the
price as well as the quantity, and as they were not
guided by ordinary business motives and did not want
to make a profit, these examples do not fit under
ordinary economic laws. But in the case of monopohes,
whether natural or artificial, the price will depend upon
the demand, and all we need say about the expenses
of production is that the price will certainly not go
below. How far above it can go will depend entirely
upon the demand. It may go a very long way, and
then those who own the monopoly will make a
fortune.

In the case of an artificial monopoly price is less
likely to go a very long way above the expenses of

140 GETTING AND SPENDING

production, because if it is suspected that extra large
profits are being made by any set of people, others
wiU try to break down the monopoly and share in
the profits. So that even if there is no actual com-
petition the possibihty that it might come into play
helps to keep down price. For instance we often see
several different milkcarts going down a street in
the morning, and one result is that each of us pays
about the same for our milk, and gets it of about the
same quaUty. For if one milk-dealer tried to raise
his price above that of the others, or watered his mUk,
he knows that his customers would leave him and
buy from one of his rivals.

But suppose the milk-dealers formed a ring or
combine and forced up the price of milk? What
would happen ? The more enterprising of the customers
might try, with the help of a goat in the back garden,
or of dried or tinned milk, to diminish the milk ring's
profits by diminishing the demand for mUk, until
the ring found it paid them better to lower the price
again. In any case a rise in the price in milk would
probably mean a falling off in demand, even without
the help of the goat. But this is not all. Suppose one
of the people in the street has friends or relations in
the country. He may arrange with them for an
alternative supply of mUk. Once more there is com-
petition, and prices wiU again come down to expenses
of production.

From the point of view of the producer then, price
must depend upon expenses of production. It cannot
go below, or he will stop producing, and the competition
of other producers is not likely to let it go above for
long, or to any great extent. The price, that is, must

VALUE AND PRICE 141

be enough to meet all the expenses of producing the
commodity and bringing it to the market, and that
means enough also to induce the producer to go on
producing, and the various people concerned in the
seUing to go on with what they do. Every one, that
is, from the first producers down to the shopkeepers,
must find it worth while to do their share of the
work. But what those expenses are depends upon
demand, whether the commodity is produced subject
to the law of diminishing or of increasing returns.

DEMAND

Let us for a moment think about the feelings which
wiU influence buyers, and determine their demand.

The first thing is certainly Price. When prices
rise demand is likely to fall, and when prices fall
demand increases. This fact is familiar to us from our
daily experience. We may also remember that there
are only a very few really rich people, more who are
rather rich, more stiU who are not rich but comfortable,
and most who are neither rich nor poor but ordinary.
There are also the really poor. Now as there are very
few rich, anything which costs a great deal can in the
nature of things only be 'demanded' by a few, and
as price falls, more and more people are able to buy
the commodity, whatever it may be. Tomatoes,
which were once the luxury of the rich, have become
cheap, and almost any one can buy them.

When demand moves in quick reply to any change
in price we say that it is ' elastic' When, on the other
hand, a fall in price does not result in an increase of
demand, nor a rise in price lead to a decrease, then

142 GETTING AND SPENDING

we say that demand is 'inelastic' The demand for
the things that are absolutely necessary is usually
inelastic : even when bread is dear almost the same
amoimt is bought as when it is cheap. Not quite,
for some waste and, alas, some needs are checked, but
the faU in demand is not in the least in proportion to
the rise in price. The demand for the luxuries of the
very rich is also inelastic, the very rich will go on
bujdng the thing however dear. Indeed there are
sometimes people who are foohsh enough to buy
things because they are dear, but they are few as well
as fooUsh, and we need nr't concern ourselves with
their doings.

There are some commodities of which people are
not likely to want more than one. Even if the price
of dining-room tables were halved, few of us would
buy another. The expenses of setting up house-
keeping would be diminished, but the number of
tables bought would not much increase. Economists
say that this sort of demand is soon 'satiated.' The
truth is that dining-room tables are not really things
of themselves, but parts of a whole; that is, of the
furnishing of a house. The mainspring of a watch is
another example, however cheap it became the demand
would not increase rapidly. We should not have an
extra mainspring each, and the cost of one is only a
small part of the cost of the watch.

Other things are affected by the possibiUty of using
something else in their stead. If tapioca became dear
and all the other things of which we make puddings
remained the same, it is probable that the number of
tapioca puddings would be very small indeed. In
this case the demand is more than elastic, it moves

VALUE AND PRICE 143

in almost violent response to a change in price. This
is called the law of substitution, and is more important
than it appears. For instance, one of the things
that would have to be considered if it were desired
to raise revenue by taxing anything would be how far
that thing was affected by the law of substitution.
A tax on tapioca might bring in nothing at all if
rice and sago and the rest remained untaxed.

Finally, there are some things for which the demand
hardly depends on the price at all. Coffins, cradles,
and wedding-cake are examples. In the case of the
last two, price would have some effect. If the number
of cradles wanted ultimately depends upon the number
of babies — and it is safe to say that the price of
cradles has no effect upon that number — yet if cradles
are very dear some of the babies wiU go without.
Similarly if wedding-cake is dear, although the number
of weddings will not be affected, some brides will have
much smaller wedding-cakes and others will have none
at all.

From the point of view of the buyer, then, demand
will generally depend upon price, though in some cases
demand is more affected by price than in others.
And the value to the buyer of anything will be what
he is willing to give for the last portion of it that he
can get at that price and is not willing to go without.
If price feU he might take more, but at a given price
he will only take that amount.

From the buyer's point of view then, demand depends
upon what is called marginal utiUty, that is, the last
portion for which it is worth while to pay the price;
from the seller's, upon expenses of production, and
these two continually act and react upon one another

144 GETTING AND SPENDING

so that it is impossible to consider either without at
the same time thinking of the other.

MARKET AND NORMAL PRICE

Meanwhile, though prices in the long run must
always be determined by expenses of production,
which in their turn are determined by demand, in the
short run they may be above or below the expenses
of production. Sudden and violent changes in demand
may occur. For example, when the late king died,
many people wanted to go into mourning; there was
a sudden check to the demand for coloured materials,
and a run on black. For a time people were willing
to pay rather more than the ordinary price for black,
while the sellers of coloured materials found their stock
unsaleable. But very shortly matters righted them-
selves : more capital and work went into the pro-
duction of black materials, or perhaps into dyeing
them, and soon demand was satisfied.

Economists make a distinction between market
price and normal price. Market price is the price for
the moment, it may be above or below normal price,
but it is always trying to get back there. If market
price is above normal price, that is, above the price
that is enough to cover all the expenses of production,
unusually high profits will be made, capital and work
will hasten into the business, and in a short time
competition will once more have restored market
price to a level with normal price. Meanwhile market
price itself may have moved. If the commodity in
question was produced under the law of increasing
returns, for instance, an increase in the demand, which

VALUE AND PRICE 145

at first sent up price, would in the end bring it down,
because of the advantages of producing on a large scale.

If, owing to a check in demand, market price had
fallen below normal price, people who had stocks in
hand, and found they could not sell them at the old
price, would be willing to sell at a lower price, doing
without their normal profit rather than fail to sell
at all. But as soon as existing stocks had been cleared,
because the sellers would in future order less of this
thing, owing to the change in demand, makers would
make less, capital and work would go out of that
business and find something else to do, and once
more market price and normal price would correspond.

The market price of things like fish and fruit, which
perish very rapidly, often changes fast. For example,
fish at a shop in a fashionable street, where rich people
shop, may be very high in price for the first part of
the day, become moderate towards afternoon, and fall
so low by closing time as to be within the reach of
every one. Probably if the whole day's takings are
considered, the fish shop will have made about a normal
profit. Market price has swungallround the normal price
level during the day, but over the day has just balanced.

Market price, then, is the temporary and changeable
price, which depends upon the demand at the moment.
Normal price is that which covers the expenses of
production. Market price may swing anywhere round
normal price, but is always trjdng to come back to
it. And meanwhile normal price itself will not neces-
sarily remain in the same place, but will be moving
upwards or downwards, according to whether the
thing in question is produced subject to the law of
diminishing or the law of increasing returns.

G.S. K

INTERNATIONAL TRADE

WHAT IT IS AND WHY IT HAPPENS

Will the conclusions at which we have arrived
about value apply to exchanges which take place
between people who do not live in the same country?

In all the arguments we used we took it for granted
that capital and workers were easily and quickly
moved, so that if less than the ordinary price could be
obtained for one commodity, and more for another,
people would move from the production of the first
and turn to the production of the second. We also
assumed that both sellers and buyers had a pretty
complete knowledge of what was going on, so that
prices could not for long remain higher in one place,
nor the average rate of profits higher in one industry,
than in any other. These conditions are more or less
true when we consider the buyings and sellings of
people who live in one country. But they are less
true when we consider those of people who hve in
different countries.

Capital is much more movable to-day than it was
fifty years ago, because of the great developments of
the banking systems of the world. And workers too
move more easily, but no one could argue that they
move as freely between different countries as they
do within a country. Nor is knowledge so complete,
and where knowledge is incomplete competition works

146

INTERNATIONAL TRADE 147

more slowly and less thoroughly. There are all sorts
of hindrances to movement and knowledge, differences
of language, of currency, of trade laws, of banking
systems, custom barriers, railway systems. No one
of them may matter very much in itself, but taken all
together they matter a good deal.

It therefore seems certain that we must think out
changes in the theory of value. Reasoning based on
one set of conditions cannot be expected to apply
in another.

The value of things produced and exchanged within
a country will, we have seen, correspond in the long
run with the expenses of production of those things.
If we cannot assume this of things exchanged between
people living in different countries we shall probably
be wise to attack the question from the other point
of view, that of the buyer. Clearly no one will go
on producing things, whether for home or for foreign
trade, at a loss. That is, the value of any commodity
cannot, except perhaps for a very short time, fall
below the expenses of production. But as competition
is incomplete, and capital and workers do not move
freely, possibly the value of an imported commodity
may be very considerably above its expenses of
production.

Let us think for a moment why people Hving in
one country buy things produced in another country.

The first reason is that they import things which
cannot be produced in their own land. History
students will remember the way the early traders
imported spices and other eastern products, which
could not be grown in Britain. Nowadays we import
quantities of things which we cannot grow at home,

148 GETTING AND SPENDING

from the everyday tea, coffee, and sugar, to Persian
carpets or South African diamonds.

Secondly, things are imported which could be grown
in the country to which they come, but only at great
difl&culty and expense. As Adam Smith pointed out,
very good grapes can be grown in Scotland, and very
good wine made of them, but no one dreams of growing
grapes for wine in Scotland. Instead, we import
wine from those countries where grapes ripen freely
outdoors. A large number of imports would be of
this kind, that is, things which could be produced at
home, but can be produced very much more easily
somewhere else.

Lastly, it may pay a country to import something
which it can not only produce itself, but produce more
cheaply or better than can the country from which
it imports. This sounds absurd, but is really quite
easy. It will happen only when the importing country
has a still greater advantage in the production of
something else, or of several other things. For instance,
the Channel Islands, with their admirable cUmate
and soil, can very Ukely grow corn more cheaply
than we can. But they may instead import corn from
us, because it pays them infinitely better to grow
early vegetables and tomatoes.

Of course, this plan is not peculiar to foreign trade,
it is probably within the experience of any of us.
There are some fortunate people who can do many
things better than the rest. They are perhaps
gifted cooks, or brilliant cricketers, and they are at
the same time particularly clever at dressmaking
or engineering. They will have to choose which of
their gifts to cultivate most, in order to earn their

INTERNATIONAL TRADE 149

livings, and they will probably choose that at which
they have the greatest relative advantage. It may
pay the girl to become a dressmaker, and employ some
one else to cook for her, although she feels sure she could
do it a good deal better than the some one else. The
boy meanwhile has become an engineer and perhaps
combines with others to pay a cricket pro. to bowl
to him and his friends in their leisure hours.

These, then, are the reasons which make people who
live in one country buy goods which are produced in
others. Now what determines how much they will
have to give for them? All trade is, as we know, an
exchange of goods and services for other goods and
services. The baker provides us aU with bread. In
return he gets not only the flour and yeast with which
to make the bread, and the coal with which to bake it,
but also the groceries, meat, clothes, housing, and other
things he wants for himself and his family. The tool we
use to carry out our exchanges is money, but money is
only a tool, though an extremely useful one, and what
really matters to us is not only how much money we
can get for what we do or produce, but also how much
we can get for money.

HOW IT WORKS

Trade between people hving in different countries is
just as much exchange as trade between neighbours,
only its workings are a little more difficult to trace.
Let us, for convenience' sake, imagine only two sets
of people, shall we say English and Spanish, and two
sorts of things exchanged. The Enghsh want oranges

150 GETTING AND SPENDING

the Spanish want tram-rails. How many oranges
will the Spanish have to give in order to get the tram-
rails they need? This depends on how much they
want the tram-rails. Suppose one cargo of oranges
when sold in England would fetch as much as it cost
to produce the tram-rails, and something over as well.
The making of tram-rails for the Spanish market is a
profitable affair : we will make more rails.

But the Spanish do not want the next set of rails
quite so badly ; moreover, when we come to sell two
cargoes of oranges in England neither are the English
wiUing to give quite so much for more oranges than
they were for the first consignment. The demand for
oranges may be fairly elastic, but when there are twice
as many as there were we shall have to lower the
price if we are to get rid of them all. But nevertheless
it is still profitable to make tram-rails and import
oranges and the business will go on. The amount of
oranges that will be given for a certain number of
tram-rails wiU depend on whose wants are the strongest.
If the Spanish are very anxious for tram-rails they
will be willing to send quite a quantity of oranges in
exchange for them. England will get her oranges and
will only have to give a comparatively small amount
of tram-rails in exchange.

Or perhaps it is England who wants the oranges,
and wants them so much that she is willing to send a
considerable number of tram-rails rather than go short
of oranges. In that case Spain will get her tram-rails
cheap. There is a downward limit each way to the
amount each country can give. However much England
may want oranges, she will not give more than a
certain number of tram-rails for them. The oranges,

INTERNATIONAL TRADE 151

when sold, must pay for the expenses of production
of the tram-rails or else clearly the transaction cannot
go on. Similarly, the tram-rails when sold in Spain
must fetch enough to cover all the expenses of pro-
duction of the oranges.

But if Spain has a special advantage in the growing
of oranges, and England one in the making of tram-
rails, the exchange may prove very profitable indeed
to both parties. The exact amount of oranges and
tram-rails which will be given for each other wUl be
settled by the strength of the two demands, and will
in the end be fixed at that point where both are satis-
fied. The value of oranges can be measured in tram-
rails, that of tram-rails in oranges. That is what is
meant when the economists tell us that the value of
an imported commodity is measured by the value of
that which is exported to pay for it.

Now we have imagined only two countries, and two
conamodities, but the case is exactly the same if we
think of all countries and aU commodities. England
may buy raw cotton from the United States and sell
cotton goods to India. India sells tea to the United
States. England has paid for her raw cotton in
cotton goods, but has done it through a third country,
India, and a third commodity, tea.

A country can only pay for the things which it
buys from another country by selling goods, or else
performing services. Before the war, we, with our
merchant ships, carried goods aU over the world; we
did a great part of the carr5dng trade of the world, and
let us hope that we shall do it again. In return for
this we received goods. A cargo boat took goods to
different foreign ports and brought back other goods,

153 GETTING AND SPENDING

which, when sold, not only paid for the goods sent
out, but for the services of the ship in carrying things
from one port to another.

Suppose a country imported more goods and services
than it exported, bought more than it sold, in other
words. What would happen? The producers of the
foreign goods have to be paid somehow, they are not
sending things abroad out of charity but to make
money. If the importing country can produce nothing
that foreigners will buy, she must pay the balance in
gold, for gold is the one thing that every country
will always take.

But when gold moves about certain things happen.
We shall be able to understand all this more clearly
when we have studied Money, but for the moment
we can say that when gold moves in or out of a country
it will produce certain effects upon the prices in that
country. The level of prices in any country depends
partly upon the amount of gold it has, for price is
simply a ratio between gold and the things gold buys.
When these trading relations began, each country had
a certain price-level, that is a certain quantity of gold
in that country would buy a certain amount of goods
and services. Or, if we Uke to put it the other way
round, a certain amount of goods and services would
buy a certain amount of gold.

Let us go back to England and Spain. Spain has
bought a great many tram-rails, and England does
not want any more oranges. Spain must make up
the balance by sending gold. Therefore Spain has
less gold and more goods than she had at first, gold
is more valuable, goods are less valuable. That is,
prices fall in Spain. But this means that though

INTERNATIONAL TRADE 153

Spain may be a very good country to buy from, as
low-price places naturally are, it is not very profitable
to sell to her. The people in England who import
oranges wiU import rather more, as they are cheaper;
the people, on the other hand, who export tram-rails
will draw in their horns, selling to Spain has become
a less profitable affair. Exports to Spain have been
checked, imports encouraged, and once more a balance
between imports and exports has been arrived at on
the new basis.

This means that as soon as any country imports
more than she can export to pay for her imports, or
as soon as any country is selling (exporting) more
than she buys (imports) forces are set at work which
encourage the one and check the other. If she has an
excess of imports, the forces wiU at once check imports,
and give a stimulus to exports. If it is the other way
round, these forces wiU have the opposite effect.

BILLS OF EXCHANGE

In actual fact a good many things will happen
before gold begins to move. We reduced our problem
to very simple terms, but let us now discover what
really does take place. A merchant here in England
has bought a cargo of Spanish oranges, and wants
to pay for them. He does not want to send gold, which
is an expensive operation. He tries to find some one
else, to whom some Spaniard owes a debt. He finds
the exporter of tram-rails. Instead of sending gold
to Spain, he pays this exporter for the oranges, and
arranges that his own creditor, the orange producer,
shall be paid by the importer of tram-rails in Spain.

154 GETTING AND SPENDING

Of course, he does not really go wandering about
England till he can find some one to whom Spanish
money is owing. Foreign trade has made its own
arrangements, and an extremely useful set of people
has come into being, who deal in foreign debts and
credits. They are called biU brokers, and our orange
importer would simply have gone to one of them and
asked for a Spanish bill. How much will he have to
pay for his biU? This wiU clearly depend upon the
demand for, and supply of, bills. If the amount of
orange bills that wanted paying in Spain was just
about the same as the amount of tram-rail bUls that
Spain wanted to pay in England, all he need pay
would be the small sum that the bill broker charges
for his services, which we remember from our arith-
metic days.

But this may not be the case. Let us once more
suppose that Spain has bought a large amount of
tram-rails, and England only a few oranges. When
the EngUsh importer goes to the biU broker he will
find that that gentleman has quite a number of
Spanish tram-rail debts that want paying, in fact he
will be anxious to get rid of them, and wiU be willing
to take less than their face value in order to do so.
This is because the people who owe for those tram-
rails know that if they cannot sell their debts to some
one else who owes a debt in Spain, they will have to
ship gold to England, and that is expensive. So the
price of the tram-rail bills in England may go below
their face value, but cannot, clearly, go farther below
than the point at which it would not matter whether
the bills were sold or the gold was shipped. The cost
of sending gold is the downward limit, gold point

INTERNATIONAL TRADE 155

below, as it is called. Spanish debts will be at a
discount.

But when the orange merchant discovers this he
reflects. He thought he owed, shall we say £100, for
oranges, and he finds he can buy the biU to pay that
£100 for less than £100. Oranges are more profitable
than he had supposed. He will order some more.
We see what has happened. The excess of Spanish
imports from England over Spanish exports to England
has set to work forces which have encoiuaged Spanish
exports to England.

Let us just cross over to Spain and see what happens
there. The importers of tram-rails go to the bill
broker to buy English debts. But there are not
enough to go round, because there have been more
tram-raUs bought than oranges sold. So the tram-rail
importers compete against one another for the orange
bills ; they will be willing to pay more for them than
their face value, because of the cost of sending gold.
How much more ? Certainly not more than the cost
of sending the gold, that is bills are at a premium,
but the premium cannot go higher than gold point.

Meanwhile the tram-rail man goes away discouraged.
He has had to pay more than he meant for his rails,
he will make his next order a good deal smaller. What
has happened ? Again we see that an excess of imports
at once sets in operation forces which discourage
exports, that is raises the price of bills. Fewer tram-raUs
will be bought, more oranges sold, and once again a
balance between imports and exports will be estab-
lished.

When the number of people wanting bills upon any
particular country, and the number of bills to be had

156 GETTING AND SPENDING

are just equal, exchange is said to be at par. When
there are not enough to go roimd, and people are
willing to pay more for them than their face value
they are at a ■premium. When there are more than are
wanted and people compete against each other to get
rid of them they are at a discount. The height of the
premium and the depth of the discoimt are limited
by the cost of sending gold.

In real hfe, when the machinery of international
trade is working smoothly, and is not, as it is now,
badly upset by war, very sUght rises and falls in the
price of bills of exchange are enough to check or
stimulate exports and imports, and the balance of
trade remains fairly steady. If we judged by the
figures, we should think that some countries imported
much more than they exported, but, as we have seen,
this cannot happen. The explanation is that such
countries are being paid in goods for services they
have rendered, or else they are being paid interest
upon loans they have made to other countries.
Similarly some countries seem to have an excess of
exports. This may be because they are receiving
services and paying in goods, or because they owe a
debt to other lands upon which they pay interest.
Other things, such as the sums spent by tourists,
or remittances sent by people Uving in other lands,
must also be taken into consideration.

FREE TRADE AND PROTECTION

It can now be seen that this theory of international
trade Is the basis upon which rests the economic

INTERNATIONAL TRADE 157

argument for Free Trade. There are any number of
social and political arguments upon both sides, with
which as economists we have no concern. What we
can see is that if through tariffs any one import into a
country is checked, some export, whether of goods or
services, which would have paid for that import
must be checked too. A tariff is a tax levied upon
an imported commodity and imposed with the object of
checking, or even of entirely preventing, its importation.
Tariffs cannot make work, what they can do is to
determine what sort of work shall be done. We may
forbid the import of pianos, for instance, and so
provide work for EngUsh piano makers. But we can
only do so at the expense of some other industry
which would have made something that would have
been exported from England to pay for any pianos
which had been imported.

Secondly, we must point out that such changes will
probably mean a loss of wealth. Broadly speaking,
the economist thinks that when there is no direction
from governments, whether by tariffs or otherwise,
both capital and workers are likely to find their way
into the industries which pay them best, and that
therefore the greatest amount of wealth will come into
existence. If we insist upon the production of English
pianos, we are benefiting the piano trade, but only
at the expense of some other which would probably
have been more profitable. (That is, if we are assuming
that without the tariff there would have been an
importation of foreign pianos.)

It is quite clear that countries may find it desirable
to encourage some industry, not because it is more
profitable, but because, although less profitable, it

158 GETTING AND SPENDING

is necessary for the general safety or wellbeing of
that country. Some people, for example, think that
agriculture should be protected, because of the impor-
tance of securing the food supply, and also because
country conditions are healthier than town life, and
the protection of agriculture keeps people, or helps
to keep them, in the country. Again, most countries
feel that they must be able to produce their own
armaments. And again, many economists have agreed
that a country may sometimes do well to make
sacrifices in order to protect a new industry, which
could only with great difficulty, if at all, compete
successfully with similar industries already established
in other lands. It is hoped that the loss may be
temporary, the gain permanent.

The practical application of these arguments is
naturally very difficult ; for instance, it is hard to teU
just how much protection such an industry really
needs, and when it is sufficiently established to do
without help. In short, there is an immense amount
to be said on all these questions, but the arguments are
mainly political, not economic, and if one is to judge
them fairly one ought to make sure that one understands
the economic result. What must be remembered is that
a check to imports must mean a check to exports, and
that it is important to weigh carefully the advantages
and disadvantages. Tariffs or other interferences with
the ordinary course of affairs have many effects; our
business is only with the economic side. Here we must
try to find out which is the export that has to be
sacrificed, or rather what effect the proposed change
will have upon our general export trade, and then we
can make up our minds whether we think the change

INTERNATIONAL TRADE 159

is worth making, or whether it will do more harm
than good.

It is also possible that the effect of protection upon
the protected industry might not be wholly good.
Sometimes the result of diminishing competition is to
lessen the need for energy and ingenuity. The pro-
tected industry, or rather those responsible for its
management, may take less trouble to improve and
develop than they would otherwise have done. The
result may even be that they become stupid and lazy,
and that despite protection foreign competition may
once more appear, whereupon the industry can think
of nothing better than to demand still higher tariffs
to protect it. None of this is inevitable, but it is
certainly possible, even probable, and it has fairly
often happened. On the other hand, industries which
have only had themselves to depend upon have been
known to be so spurred to efficiency by the com-
petition of foreign producers as to bring about tremen-
dous improvements in the business which perhaps
they might not have imdertaken, or might have
postponed, had it not been for the effects of com-
petition.

Suppose one country made boots, not only for itself,
but for export. By-and-by a new kind of boot comes
into demand, perhaps a thinner and lighter kind,
because of the growth of cities and the increase of
pavements and tramcars. Another country, in which
city life has developed very rapidly, has worked out
the necessary machinery for making this new kind
of boot, and not only threatens to swamp the country
of the original boot trade, but threatens all their
foreign markets as well. What can the boot makers

i6o GETTING AND SPENDING

do? Clamour for the protection of a tariff? Suppose
they get one, they can indeed secure their own home
market, or some part of it, but they can do nothing
to keep the new boots out of the foreign markets to
which they have hitherto sold many boots. So that
the results of protection might be (i) a reUef to the
minds of those bootmakers who produced for their
fellow-countrymen; (2) no relief, but great anxiety,
to those who produced for foreign markets; (3) some
annoyance to their fellow-citizens, who cannot get the
new kind of boot, much as they want it, unless they
are prepared to pay an increased price.

Now if they do not get protection, what will happen ?
Let us suppose that they are clever and resourceful
people. They will send some one abroad to see how
these new boots are made, they will import the
necessary machinery, and use their own skill and
experience of the boot trade to make these new
boots, if they are what people are going to want.
They may have a hard time for a bit, till they get
used to it, but let us suppose that they are successful
and make the new boots well enough and cheaply
enough not only to supply their fellow-countrymen
but also their foreign customers. Perhaps they will
in the end even improve upon the imported machinery,
not only make it at home, but make it better and
the boots better too.

This sounds a little absurd, but the English boot
trade did at one time pass through just such a crisis,
and came out triumphant. There were demands for
a tariff, but they were unsuccessful, and the boot
manufacturers, thrown upon their own skiU and that
of their workers, soon recaptured their own trade,

INTERNATIONAL TRADE i6i

kept their foreign markets, and even developed a
large export trade to the country which had originally
threatened thena.

All these possibihties must be considered and duly
weighed. The circumstances of different countries,
different trades, and different times will vary. Some-
times it may be wise to sacrifice an immediate gain
for the sake of a possible future one, or face an economic
loss for the sake of a pohtical gain. On all these
questions there is room for wide and honest difference
of opinion. But it is certainly of the first importance
to understand something of what is entailed.

Since the great war all the conditions of foreign
trade have been in such difficulty and confusion that
much of the ordinary economic reasoning needs
modification. But we must all hope that in due time
order will once more return to a disordered economic
world, and meanwhile there are plenty of problems
and plenty of room for careful economic reasoning.

G.S.

MONEY

WHAT IS MONEY?

Almost as soon as man began to exchange things
he must have felt the need for something with which
to measure. It is diiBicuIt and tiresome to reckon
how much cloth shall be exchanged for com, or
skins for metals, although, no doubt, for many a long
day man did perform these operations, at the cost
of much bargaining and anxiety. Indeed, for the
matter of that, he performs them stiU in primitive
communities. But in time he came to find it a great
help to have some one thing against which he could
measmre all the other things he wanted to exchange,
so that he had only one set of reckonings to do instead
of dozens. He also discovered another useful plan,
and that was to have some one thing with which if
he wished he coiild make payments. All trade is,
of course, barter, but it is very convenient to be able
to do your bartering in terms of some one thing
which every one Is willing to take, and which, there-
fore, can be used in all exchanges. In other words,
man found that he needed money.

All sorts of different things are, and have been, used
as money. Skins, cattle, slaves, and shells are only
a few examples. Gradually most civilised nations
came to use the precious metals, gold and silver,
and by the end of the nineteenth century most of them
had settled on gold.

162

MONEY 163

Now in order to do the work of money really
well the thing chosen should have certain qualities.
In the first place it must be something which every
one is eilways willing to accept, otherwise clearly
it will be a very inefficient money. Imagine the
position of some one who had sold his produce for
what he thought was money, which he could use
in his turn to buy the things he wanted, and then
discovered that no one would be willing to take it
in exchange for their goods or services. But if
it is to be always acceptable it must have value of its
own, for people are always wilhng to take that which
has value because they know that they can always
get something else in exchange for it. So the first
essential for a good money is value.

Another quality which is important and very
desirable, but uncommonly hard to get, is that the
value of the money-thing should always remain about
the same, so that any one who takes money in exchange
for what he sells should be reasonably sure that when
later on he spends the money it will buy as much as
it did when he sold his goods. Nothing is more trying,
as all of us who are living nowadays know to our cost,
as changes in the value of money, that is in the amount
of goods and services that our money will buy.

Then it should be something which is very difficult
to destroy, not something which wastes away or is
easily burnt or injured. Again, it is important that it
should be easily divided, and that when it is divided
it should not change its value. Diamonds would not
be good money, because if you cut a diamond up
each little bit is only worth a very small part of what
the whole diamond would have fetched imdivided.

i64 GETTING AND SPENDING

Diamond chips are not very valuable, whole diamonds
are, and the larger they are, the more precious they
become. The increase in value is out of all proportion
to the increase in size.

One of the obvious difficulties about the use of
cattle or slaves for money is that they cannot be
divided, and they are so large that they are no sort
of use for small purchases. They are not very con-
venient for other reasons; for instance, they vary
very much in quahty. One cow might weU be worth
two or three others, so that if things were reckoned
in cows one would have to be very careful to know
what sort of a cow was meant. Gold on the other
hand, if it is of a certain 'fineness,' can be divided
and yet remain of the same value. Two half ounces
of gold are worth just the same as one undivided
ounce of gold, but two halves of a diamond are not,
and one cannot think of half of a slave or a cow,
unless indeed the cow is dead, and a dead cow is sadly
wanting in one of the other quahties of good money,
which is, as we have seen, indestructibility. Lastly,
it should be easy to carry about and easy to recognise.

After many experiments then, we have settled,
most of us, upon gold as being the thing which on the
whole possesses most of these qualities in the highest
degree. Many other things possess one or more of
them, but on the whole gold possesses most.

Money, alas, is another of the tiresome words which
are used to mean many different things, and it is
sometimes convenient to call the sort of money of which
we have been thinking currency. That is, it is something
which runs, or passes readily from hand to hand.
The word money is often used in daily Hfe to mean

MONEY 165

not only currency but also what we should call loanable
capital; that is, the capital which has been saved
and can be lent to those who want to use it. For
example, the Money Market, about which there is a
page, or part of a page, in most newspapers, is not
concerned with currency, but with loanable capital.
It is most tiresome that money should mean so many
different things, but if we are on the look-out we ought
to be able to guard ourselves against making mistakes.
Plenty, however, have been made for want of dis-
tinguishing between the different meanings of that
hard-worked word.

As gold is very valuable, that is, a small quantity
of gold will exchange for many other things, it is
found convenient to use substitutes for small purchases.
In England gold is the standard, the real money, in
terms of which everything else is measured, and before
the war we all used it, and carried it about, that is
if we were rich enough. But for small buyings and
sellings it would be a nuisance to use tiny bits of gold,
which would probably get lost, so that we use silver
and copper to represent fractions of gold. Silver and
copper coins are called token coins. The difference
between them and sovereigns is that the value of the
gold in a sovereign is the same as that of the same
amount of gold if not coined. The value of the silver
and copper in shilHngs and other coins is not. They
are only tokens, that is convenient representatives of
fractions of a sovereign, and they need not necessarily
have any particular value in themselves. The chief
reason why they are made of metals which are
valuable in themselves is to guard against forgeries.
It is extremely tiresome to have to test every

i66 GETTING AND SPENDING

coin to see if it is genuine or not. So token
coins are usually made of something fairly valuable,
and are made in such a way as to be difficult to imitate.
The main thing to remember about them, however, is
that what one can buy with them does not depend
upon the value of the silver or copper of which they
are made, but upon that of the gold which they are
used to represent.

It is also inconvenient to carry about large
quantities of gold, so that another device has been
found to avoid that difficulty. Banks print what
we know as bank-notes, which are simply promises
to pay so much gold, and these bank-notes can be
used as money so long as people are sure that the
banks can really pay out the gold in exchange for the
notes if it is wanted.

Legal tender money is money which by law any
man can use for the payment of his debts to any
amount. With us, sovereigns and half sovereigns
used to be (and stiU are, only we never see them) legal
tender, so were Bank of England notes, about which
there wiU be more to say when we come to Banking.
Silver is only legal tender to the amount of 40s. and
copper up to is. If some one owes a debt of 42s.
and tries to pay it all in silver or copper the shop
may, if it is obliging, take its debt in this form, but
it may refuse, and the debtor will have to find the
paper substitutes for a sovereign with which we have
aU grown familiar since the war, until the days when
sovereigns return once more.

MONEY 167

WHAT DETERMINES THE VALUE OF MONEY ; THAT IS,
THE LEVEL OF PRICES?

Now at this point it has become clear that both
paper money and token coins are but representatives
of gold, and that therefore we can ignore them and
fix onr minds upon gold. What settles how much we
can get for our gold, and why does a certain amount
of gold sometimes buy more and sometimes less?

As we saw when we were thinking about trade, the
price of goods or the level of prices is but another
way of describing the value of gold. If an ounce of
gold will buy a certain number of yards of cloth,
then so too will that number of yards of cloth buy an
oimce of gold. It is the same thing the other way
round. Only we are so used to reckoning things in
terms of gold that our mental muscles rather ache
when we try to reckon gold in terms of things. We
think easily enough of the price of com, but not so
easily of the price of sovereigns.

What we need to remember is that the value of
gold, like that of everything else, depends upon the
demand for and the supply of gold. If gold is abundant,
as it is, for example, in a gold-mining district, prices
will be high, or in other words gold will be cheap. In
the days when a penny was the ordinary fare for a
bus or a tram, and halfpenny fares were, if short,
quite often worth having in England, the shortest
distance in Johannesburg cost threepence. This is
because gold was produced near Johannesburg, and
other things were relatively scarce. Gold was cheap,
goods were dear. In most places, where the opposite

i68 GETTING AND SPENDING

is the case, and where gold is scarce and goods are not,
prices are low. Gold is dear, goods are cheap.

The demand for gold depends partly upon the use
of gold for money work, partly upon its use for other
purposes. When it does not take quite so many
commodities to buy gold, in other words when gold
is cheap, more people will have gold rings and gold
necklaces. When it takes many things to buy gold
fewer people will use it for ornaments. This double
demand for gold helps to keep the supply steady,
for when gold is cheap, that is, when there is a good
deal of it, people wiU use it for commercial purposes,
ornaments, and the Hke. This wiU draw away part
of the supply of gold, there will be less of it available
for money, and thus prices will be steadied again.

There are two elements which have to be con-
sidered in thinking of the supply of gold. One is the
actual amount there is; the other, which concerns
that part of the supply that is used for money, is
how much it takes to do the work that money at the
time has to do : in other words, the amount of
exchanging which has to be done by means of money.
Supply, that is, is amount, and rapidity ol movement.
If a coin changes hands half a dozen times, it does just
the same work as six coins each changing hands once.
This rapidity of movement is very variable, depending
on all sorts of things. In agricultural districts, more
money is needed at harvest time. Most of us use
more at Christmas than at most times of the year,
and more at the end of the week, when we do the
family shopping, than at other times.

But broadly speaking, gold manages to move itself
to where it is wanted, because every one is always

MONEY 169

willing to take it. It moves itself through the
machinery of price, as we have already seen. If there
is much of it in any one place, in that place gold will
be cheap, prices high. Therefore that place will be
a good one to sell to, a bad one to buy from. Goods
will come flowing in, gold wiU have to move out. In
ordinary times, therefore, each country manages to have
the amoimt of gold that it needs to do its money
work. If it has too little, prices will be low, people
wUl hasten to buy there and will be reluctant to sell.
They will bring or send gold to pay for their purchases.
In the same way new discoveries of gold spread
themselves over the world, and the new supplies are
distributed to where they are needed. In the long
run, the value of gold, that is the level of prices, must
depend upon the expenses of production of gold.
Only it is a very long run, because gold is not quickly
consumed, it is aU somewhere, and so any new supply
is only a sort of ripple upon the surface. Still, what
can be got in exchange for it does determine how
much of it is produced, because the producers of gold,
like the producers of anything else, have to be paid
in goods and services for their work, and if the amount
of goods and services they can get is not enough, no
more gold will be mined. Gold wiU be dear, prices
low. When that happens, people, finding that they
can get many goods for their gold may feel inclined
to melt down their ornaments, more gold will come
into use as money, prices will once more begin to rise,
more mining probably wili be done, and again a
balance will be attained.

170 GETTING AND SPENDING

INCONVERTIBLE PAPER MONEY

In our own days all these processes are very much
interfered with, and prices jerk about in the most
uncomfortable manner because the war has thoroughly
upset all currencies. The governments of all the
fighting countries needed an immense quantity of
all sorts of things to carry on the war, and to pay for
these things within their own countries they used
their authority, printed bank-notes which did not
really represent gold, and printed more and more of
them as time went on. They used their gold to pay
for their imports. They could not pay in goods because
they were so busy making shells and guns and equip-
ment that there were fewer goods to pay for exports.
This is nothing new, it has almost always happened
in time of war, it has always had the same disastrous
resvilt, and nevertheless it happens again.

Up to a certain point these notes work quite well.
The government of the country that issues them says
they are legal tender and backs them with its authority.
People are willing to take them, because they can
pass them on again, and get what they want with
them. As long as there are only enough to do the
money work that that country requires, all is well.
But as a rule all soon becomes anything but well.
We saw that the money work required to be done is
a very variable amount, and that countries get the
gold they need when they need it through the workings
of the foreign exchange.

Suppose one country has as much money as it
needs, gold and the new notes, say at Christmas. By

MONEY 171

February it has much more than it needs, for February
is a quiet time with little work for money to do. So
as there is too much money, prices show an inclination
to rise. Gold begins to leave the country, and prices
steady again. But by March and quarter-day more
money is needed. The government yields to the
temptation and issues more notes. This goes on
until all the gold is driven out of the country, or is
perhaps hoarded, and then the prices of that country
only depend upon paper. They are almost certain to
rise, because as the paper is only useful inside its own
country it cannot get out. No one else will take it.
So what was enough at one time is soon too much,
and prices rise. Then more notes are issued to keep
up the new level.

This is exactly what has happened to us all,
not only in England but to others as well, and
very unfortunate it is. Each country has an artificial
price level, and there is no means of steadying
them and getting them into proper relations with
one another, because each country is full of paper
money which does not represent gold, has no sort
of value, and can only be used inside the cotmtry
which issues it. Much the same happened after
the Napoleonic wars, and every one was made
uncomfortable, just as we are, until at last the paper
money was reduced to small quantities and prices
were once more gold prices.

The purchasing power of money, that is, the amount
of goods and services that a given amount of money
will buy, has undergone many changes. We get
examples of prices in the history books, prices that
seem very different from those we know. Yet, although

172 GETTING AND SPENDING

competition worked but weakly, and neither people
nor things could move with any considerable degree
of freedom, so that prices depended partly on custom
and only partly upon economic forces, the fundamental
reasoning about money applied many centuries ago,
as it does now. The theory of international trade
and the definition of price are both admirably expressed
in an old song : —

'The fairest pearls that northern seas do breed
For precious stones from eastern coasts are sold;

Nought 3delds the earth that from exchange is freed.
Gold values all, and all things value gold.

No mortal thing can bear so high a price
But that with mortal thing it may be bought.

The com of Sicil buys the western spice,
French wine of us, of them our cloth is sought.*

Greskam's Law, as it is called, dates from Elizabeth's
time. Sir Thomas Gresham pointed out that bad
money was hable to drive out good while good could
not drive out bad. This is exactly what happens
when governments issue paper money, that is, notes
which cannot be changed back into gold. Every one
uses the notes to pay with, the gold is hoarded or sent
abroad. If a bad coin gets into circulation, most
people will do their best to get rid of it, to pass it on.
They may not be pursuing the most virtuous course,
but, virtuous or not, it is the course which is usually
pursued. Gresham's Law can only apply when the
good and the bad moneys are both working together,

MONEY 173

and when there is not enough work for them both to
do. As long as they are both needed, both will remain
at work. But if there is not enough for them
both to do the bad will remain and the good will
disappear.

Whenever in the past there has been a great increase
in the amount of the precious metals, there has been
a rise of prices and disturbances. As we know from
our own experience, other causes may have the same
effect, shortage of goods, as in war time, too much
paper money, and other things which would take too
long to discuss now. But a rise or fall of prices has
certain definite results, some people suffer and others
gain, in either case.

When prices rise, there is Ukely to be a stimulus to
trade, people think they wUl get more money for
what they have to sell, and they do not always realise
that they will also have to pay more for what they
buy. Borrowers gain. A man borrows £100 and it buys,
let us say, a hundred commodities of some kind.
When he repays his £100, some time later, it wiU only
buy £95 of such commodities. He has paid back the
same money, but its value is less. This tendency helps
to encourage borrowers, and perhaps in this way gives
a stimulus to trade, as trade is mostly conducted
with the help of borrowed capital. But if it encourages
borrowers. It must clearly discourage lenders, so that
saving does not seem attractive. If what one saves
will be worth less and less as time goes on, why not
spend it now and enjoy it while one can? Moreover,
rising prices are very hard on aU those who have
incomes of a fixed amount, pensioners, for example,
or people who are Hving on their savings. It is hard,

174 GETTING AND SPENDING

too, on people who receive salaries or wages and
cannot get them raised S9 as to make up for the
increased prices.

We have all heard about these difficulties, and many
of us have experienced them during the last few years.
We have tried to get over them by paying " war bonuses,'
but many people who could not get bonuses have
suffered sadly. It is not easy to alter wages either,
they may get raised, and do, but it is very difficult
to arrange for the rise to correspond exactly with the
changes in price, so that in times of rapidly changing
prices there are almost certain to be trade disputes and
troubles about the rate of wages.

It is possible that some of the difficulty may be
avoided in future by the use of a 'sliding scale.' A
fairly accurate measure of the changes in the price
level can be made by keeping lists of the prices of a
number of those things which every one uses, coal,
foodstuffs, clothing materials, and the like. Then
by the aid of some skill in arithmetic the value of a
given sum, say of £i, in different years, can be dis-
covered, and wages can be graduated in such a way
as to make their real worth, that is, the amount of
goods and services that the wage-earner can obtain,
remain about the same. The wage-earner may get
a different number of coins, but what he can buy
with them will remain the same. The war bonus paid
to civil servants, for example, is calculated on these
principles, and so too are the pajTnents of railway
servants and workers in some industries.

To sum up then. The level of prices depends upon
the relation between the money supply, and the work
that money has to do. Changes in price levels may

MONEY 175

come from changes in the amounts of money, or from
changes in the methods of production of goods, or
from changes in methods of transport, or in the
methods of carrsdng on business. As far as gold is
concerned, in normal times, when the exchanges are
working smoothly, the supply is automatically dis-
tributed among all the nations that use gold through
the channels of foreign trade. Since the war all these
channels are, so to speak, silted up by the currency
troubles of the different countries, and we cannot
hope to get back to steady prices, or to healthy con-
ditions of trade, until currency is in a better condition.
Currency is only one of the reasons for omr present
troubles, but it is important, and the currency question,
which used to seem rather abstract and unreal, is now
one in which many of us take a hving interest; and
we are anxious to understand more about it, because
we reahse how much of our own personal comfort and
happiness is affected by it.

BANKING AND CREDIT

BANK-NOTES AND CHEQUES

As we all know, many of our buyings and sellings
are done not by means of actual money, but by
substitutes which do the work of money. Sometimes
we pay with bank-notes, sometimes with a cheque.
Now how is it that these bits of paper, which clearly
have no sort of value of their own, can and do perform
money work?

Both bank-notes and cheques are promises to pay
definite sums of money. We are willing to take
bank-notes because we believe that the bank which
issues the note will, if we present the note at its counter,
give us in exchange gold, silver, and copper in the pro-
portions we want. Bank-notes used in old days to
be printed by many banks, but gradually these small
note-issuing banks have gone out of existence, and
become merged in banks of another kind, and practi-
cally the only note-issuing bank that we need consider
in this country is the Bank of England.

The number of notes that the bank may issue is
strictly limited by law (by the Bank Charter Act of
1844) : that is, it can issue as many as it likes, but
after a certain number, for every note it issues, it
must keep in its cellars the amount of gold that the
note represents. These conditions have been tem-
porarily changed by the war, but before the war,

176

BANKING AND CREDIT 177

except in times of great emergency, the bank-notes
really did represent gold, and every one knew that
gold would always be given by the bank in exchange
for its notes. This is still true, except of the war-
notes — the £1 and los. notes in use now instead of
sovereigns and half-sovereigns. Therefore bank-notes
were most convenient methods of paying large amounts,
and could even be used abroad, for so generally known
was the fact that the Bank of England note really
meant gold that almost every one was willing to take
it and it could be used all over the world.

A bank-note then is a credit instrument, that is,
it is a substitute for metallic money, and its accept-
abiUty depends upon the belief in the credit of the
bank that issues it, a beUef that the bank can and
will give gold in exchange for it.

Now what is a cheque ? A cheque is a written order
by some one to his bank, to ask that bank to pay a
certain simi upon the presentation of the cheque.
The willingness of any one to take a cheque in pay-
ment of a debt, then, depends not only upon his
belief in the bank upon which the cheque is drawn,
but also upon his belief in the person who draws the
cheque. Any one in England, and many people
abroad, will take a £5 note in settlement of a bill.
But they wUl not take a cheque for £5 unless they
know the person who draws the cheque and believe
in his honesty and credit. A bank-note, if it is backed
by the authority of the government, and issued under
special safeguards, may be currency, but a cheque
cannot be anything but a substitute for currency,
because its acceptabiHty must depend entirely upon
the economic character of the person who draws the

G.S. M

178 GETTING AND SPENDING

cheque, and the knowledge of that character on the
part of the person who takes it.

We have now met several different methods by
which debts may be paid. Within a country, they can
be paid in the standard coin, up to a certain sum in
token coins, in notes which do (convertible paper
money), and notes which do not (inconvertible paper
money) represent gold. They can also be paid by cheques
and other credit instruments, provided that there is
some knowledge as to the "credit' of the people who
draw the bills or cheques. Between countries, they
can be paid in gold, or in bills of exchange, that is,
bits of paper which represent goods. Token coins
are no use, neither are bank-notes which do not repre-
sent gold; but bank-notes which do, and are well
known to be readily exchangeable for gold, may occa-
sionally be used. Cheques can sometimes be used,
but probably what happens when we pay a debt
to some one in a different country by means of a cheque
is that we transfer the trouble of finding a bill of
exchange to our bankers.

CREDIT

Credit clearly is a useful thing to have. Credit
really means the belief on one person's part that
another person can be trusted. We trust the bank;
we are wiUing to take bank-notes. We trust a person,
we are wiUing to take his cheque. If we give any one
credit, that really means that we hand over to that
person our power to buy a certain amount of goods
and services. We cannot transfer what we do not

BANKING AND CREDIT 179

possess, and we shall not transfer it unless we think
we shall get it back again.

The really important work of banks is the organisa-
tion of credit. They collect the purchasing power
that some people have, and do not want for the
moment, and enable other people who have not got it,
and do want it, to make full use of it. A good banking
system is like a good irrigation system: it collects
all the Uttle trickles of credit, accumulates them in
suitable reservoirs, and out they go again into
irrigation channels, bringing prosperity and produc-
tiveness with them.

Let us see how this actually works. Banks do
two things : they accept deposits, and they make
advances. The deposits are the little trickles or
streams, the advances are the irrigation channels.

Suppose it is just before harvest time, and a farmer,
who has a splendid crop, has not enough money in
hand to pay all the heavy expenses of harvesting.
He can go to the bank and ask for an advance. If
the bank manager knows him, believes him to be an
honest and reUable person, he will advance the amount
he wants to tide him over until he can market his
crop. The bank can do this in several ways, of which
the easiest is by allowing the farmer an overdraft
on his account. The farmer will have to pay some-
thing for this overdraft, that is, for the use of more
purchasing power than he actually has, but he will
be willing to pay, because it is worth his while. What
he pays is really interest upon a loan. Or suppose that
a manufacturer wants to instal a new machine, or
enlarge his factory, in the same way he will go to
the bank for a loan to enable him to do so. If the

i8o GETTING AND SPENDING

banker thinks him capable and reliable, he, too, will
get his advance.

But where does the bank get the necessary credit,
or purchasing power, from which to make advances
to the farmer or manufacturer? A bank cannot
advance what it has not got, or at least if it does it
will be pretty sure to come to grief. What it advances
is the purchasing power of its depositors, which they
do not want, and have left in the bank's care.

A school-teacher, or a works' manager, gets a salary,
that is, the right to use a certain amoimt of goods
and services, in return for his own services. He is
paid quarterly. He does not wish to keep the money
in the house, it would be an anxiety . He takes it
to the bank, which will take care of it for him, and pay
it out to him as he needs it. When he requires some of
it he will write out a request to the bank to pay him
a certain sum, that is, he will draw a cheque. Mean-
while the bank, with which he may have dealt for
some time, will know that he will only want a third
of it by the end of the first month, two thirds by
the end of the second, and the remaining third will
not be drawn out until the end of the quarter. The
bank knows, therefore, that it can lend out that
amount of purchasing power, some of it for one month,
some for two, and some for three.

Taking the average of all its depositors, it will
know fairly well how much at any time it can safely
advance, and how much it must keep at hand in order
to cash cheques. The more it can use, and get interest
for that use, the more profitable will its business be. So
that one of the things a successful bank manager has to
do is to lend out, advance, as much as he possibly

BANKING AND CREDIT i8i

can, and yet always have enough to provide his
depositors with the cash they require. It is also to
the interest of the community that credit should be
as fidly used as possible, for the more fully it is used
the greater will be productivity. So that a good
banking system is an extraordinarily important part
of economic machinery.

MODERN BANKING

Banking systems have developed with immense
rapidity in the last half-century. The old-fashioned
bank made conditions as to the amount of the balance
it expected its depositors to keep, and the size of the
cheques they drew, conditions which meant that only
rich people could have banking accounts. That is,
the bank had comparatively few deposits, but they
were large; it changed few cheques, but they were for
substantial sums. Now banks are wiUing to change
small cheques, certainly for anything over a pound,
and often for sums below a poimd, though every
cheque means a certain amount of work and trouble
for bank clerks, so that we might be inchned to think
that few cheques and large ones would be preferable.
They wiU also accept small deposits, and almost any
one can now have a bank and a cheque book if he or
she wishes.

The real reason for this change is that, though a few
large depositors might mean httle trouble, they also
meant little return. If one of them died, or quarrelled
with the bank, and withdrew his account, a large pro-
portion of the bank's deposits was gone. A large, very
large, number of small depositors gives a much safer

182 GETTING AND SPENDING

average ; the larger the number the steadier, they are not
likely all to die or withdraw at one and the same moment.
But as few are rich, if banks want many they must
provide the conditions which will suit the many,
and this is what they have done. The result is admir-
able from the national point of view, for it means
that the very best use is being made of the credit
of as many as possible of the people who make up the
nation. The reservoir, instead of being fed by a few
streams, collects the waters of all the tiny brooks
and streams, so that hardly a drop is wasted.

The older independent banks, of which we read in
old-fashioned novels and memoirs, served only one
district. To-day they are more Ukely to be branches
of some great bank which has other branches all over
the kingdom. Again this is economical, for it means
that the credit of those districts where people save
is placed at the disposal of the districts where people
need capiteil. To use the irrigation idea once more,
the older plan meant a number of smaUish reservoirs,
not connected with each other. The districts with a
heavy rainfall would have more water than they
could use, those which had but little rain would be
parched. Now aU the reservoirs are Unked up, and
the water can be distributed all over the cotmtry.

Advances can be made in several ways, and perhaps
the most familiar after the temporary overdraft, is
what is known as discounting bills. When a merchant
sells something, instead of being paid at once, he
usually expects to be paid in three months. But
suppose he needs the money now. He can go to his
bank, taking with him the bill, that is, the promise
to pay three months hence, and the bank will pay

BANKING AND CREDIT 183

him, in exchange for the bill, not the whole amount,
but the whole amount minus the interest it would
earn during the three months. The owner of the biU
can either wait three months and get the whole, or
take it to the bank and get it discounted.

The banker is very wilUng to discount the bill, if
it is a good bill, that is, one drawn upon a reliable
firm or individual, for it is a convenient way of using
the capital at his command. If he can keep a constant
supply of bills coming in to be discoimted, and the
corresponding supply of bills being paid, he will have
succeeded in using all his deposits as far as possible,
and at the same time having always enough cash in
hand. The owner of the biU will be pleased too. He
needs the present value of the bill more than its future
value, because if he has the use of the money now he
can do more with it than he could with a larger sum
three months hence. So it is a satisfactory arrangement
all round.

Let us think of the farmer once more. This time
he has not needed help from the bank before the
harvest, he has got it all in, and everything has gone
well. But the com dealer, to whom he has sold the
bulk of it, follows the usual custom and pays by a
bill dated three months hence. That comes to near
Christmas, and the fanner has several things for
which he needs cash before then, perhaps a new horse
or even a tractor. He thinks over the matter and
decides to ask the bank to discount the com merchant's
bUl. The money now is worth more to him, even
allowing for the discount, than the total sum will be
three months hence. The bank is delighted, and every
one satisfied.

i84 GETTING AND SPENDING

The Bank of England is in a special position. It
is the heart of the EngUsh banking system. To begin
with, it is the only bank which can issue notes that
are legal tender, but it is also the bank with which
other banks themselves deal, the bank of banks, and
moreover it does all the banking of the government.
It is easy to see what an immense amount of business
must be involved by this. The government deals
in miUions, and the bank which does its work must
necessarily handle very large sums, and hold a position
of great responsibiUty.

The rate of discount decided upon at any time by
the Bank of England is usually taken as the current
rate by all the other banks. Therefore upon its
wisdom much will depend. If the bank rate is
raised, there is a check to borrowing, a stimulus
to lenders. If it is raised too soon, or not soon
enough, business may suffer. If borrowers are
checked just at the moment when business is hkely
to revive after a period of slackness, or if the bank
rate were not raised in time to stop a fit of wild specula-
tion and over-trading such as is Uable to attack even
the sober business world, then in either case industry
might be the worse for many a long day. Great
indeed is the responsibility of the Bank directors.

Under the provisions of the Bank Charter Act of
1844 the two sides of the Bank of England are entirely
separate. The Issue Department is solely concerned
with the business of issuing bank-notes, and also acts
as a link between the pubhc and the Mint. If any one
who has gold takes it to the bank, he will receive the
appropriate number of sovereigns in exchange. The
bank charges a very slight discount for this prompt

BANKING AND CREDIT 185

change, an amount which is supposed to represent the
difference between the present worth of the sovereigns
and the time it would take actually to coin the gold.
The Banking Department carries on all the other
business which has been described, and very important
business it is, although its responsibiUties are not
quite so great now that the other big banking com-
panies have become so large and important, and tend
to rely less upon the help of the Bank of England
than was the case in former years.

The business of banks, then, is to organise credit.
They do it by taking the spare purchasing power of
as many depositors as they can possibly obtain, and
using this purchasing power by placing it at the
disposal of people who need it, who can use it to increase
wealth, and who have not got it. In order to attract
as many customers as possible they now give facilities
to quite small depositors, and the result is that their
transactions are spread over a very wide area, and
are therefore less hkely to be upset by local disturbances.
Of late years the old independent banks have gradually
disappeared, though some stUl survive, and banking
business is mostly done by the great joint-stock banks
with branches aU over the country. This is economical,
not only because, as we have seen, it equalises the
inflow and outflow of capital between the different
parts, but also because each branch has the strength
of all the other branches behind it, and is therefore
very unhkely to get into difficulties. The 'run on
the bank' and consequent collapse which so often
occurs in story books does not, fortunately, happen
to-day, though there have been sad instances of
bodies which were not really banks at all but

i86 GETTING AND SPENDING

fraudulent institutions. They appealed to the greed
of the public by offering very high rates of
interest, and in the end went bankrupt, leaving loss
and misery to their unhappy customers. Leaving
these aside, the existence of a good banking system,
so organised as to make the very fullest use of the
loanable capital (that is, the purchasing power not
immediately required), of as many people as possible,
is one of the most important parts of the economic
machinery of any country, and one of the most vital
agents in the production of wealth.

APPLIED ECONOMICS

PUBLIC FINANCE

RATES AND TAXES

As soon as people are grouped together into organised
society they find it worth while to pay their govern-
ment to do certain work for them. They need to be
defended against attacks, they want justice, they
want peace kept at home. As time goes on more and
more work is imdertaken by pubUc bodies on behalf
of the people they represent. To-day we have our
government, acting for cdl the citizens, not only
providing for the essentials of civilisation, peace,
justice, and defence, but also for such matters as
education, public health, and insurance, and also for
all the complicated business which results from our
relations with other countries, with the colonies and
the self-governing dominions. There are also a number
of local bodies, county and town and district Councils,
doing any amount of work, cleaning and hghting and
draining, carrying out the Acts which relate to pubhc
health and education, perhaps providing trams and
gas and electricity.

All this, whether it is done by government or by
the local Councils, has to be paid for. The citizens,

that is, the electors, have to decide what shall be done

187

i88 GETTING AND SPENDING

by government for them, and what they will leave
to be done by private enterprise. Questions of this
kind are continually imder discussion, and the work
of public bodies has increased enormously of late
years. When the electors have decided what they
wish their public bodies to do, they have next to face
the less agreeable task of deciding how they will raise
the money to pay for the work they require. As we
all know, questions of taxation are settled by ParUa-
ment, questions of rates by local Councils. Both
ParUament and the Councils are directed and controlled
by the electors, who thus decide how much they wish
to pay and what they want to have done for them.
All this is the very groundwork of poUtics. Where
does the economist come in?

He has a very important part to play. In the
first place he can point out, if he is able to do so, the
advantages and disadvantages, from the economic
point of view, of handing over to the State any special
service that may be under consideration. But it is
also his business to point out, as far as he can, what
will be the actual economic effects of any taxes which
are proposed, to watch and explain the actual effects
of those which already exist. It is one thing for
Parliament to decide to impose some tax, it is quite
another to work out exactly what the effect of that
tax will be, and who in the long run will bear its
burden. This is the work of the economist.

There are thus two sets of questions. In the first
place, what services should be performed by public
bodies, and next, which should be paid for nationally,
that is, out of the taxes, which locally, that is, out of
the rates? Putting it very shortly, it is usually found

PUBLIC FINANCE 189

convenient to pay locally for local work, for instance,
the care of the roads, the local drains and light. It
is also usual to pay locally, with some help from the
taxes, for work which is national in character, but is
actually done locally, for example, education and
police. The people of the locahty benefit from this
kind of service, but it is of national and not only local
importance. And sometimes it is convenient to arrange
locally for national work because the people of the
locality know more about their own conditions, and
carry out the work more economically than would be
possible for a national body.

The taxpayer and the ratepayer are always quarrel-
ling. The ratepayer wants the taxpayer to help him,
the taxpayer wants the ratepayer to do his own
work. To a great extent they are the same people,
but there are more taxpayers than ratepayers, as we
shall see when we come to consider who pays rates
and why, so that the ratepayer feels his burdens very
heavy and is always trying to shift them on to the
broader shoulders of the taxpayer.

The next set of questions is. How ought taxes to
be levied? How should the pubhc services be paid
for?

Clearly the answer to this will partly depend upon
the labours of the economist, who must work out the
effects of any given tax, point out the people upon whom
it win really fall, how they will be affected, and what the
results of the tax are likely to be. Let us, as a wise
precaution, first be quite sure that we know what
we mean by a tax. A tax is a compulsory payment
made by individuals to the government, in order to
pay for the work of government. People pay taxes

igo GETTING AND SPENDING

because they have something, for instance, an income,
a dog, a wheeled vehicle, or because they do some-
thing, for instance, import tea or make beer.

TAXES : THE QUALITIES OF A GOOD TAX

One of the things which people constantly forget is
the rather obvious one that every penny which is
paid out by the state or the municipaUty has first to
be extracted from the pocket of somebody, and one
of the functions of the economist is to consider whether
that somebody is Ukely to use the money more econo-
mically than the pubKc authority, a matter which
partly depends upon the efficiency of the somebody and
of the public body, and partly upon what each of them
means to do with it. In any case, the operation of
getting the money out of private pockets into the
hands of the Chancellor of the Exchequer or the City
Treasurer is bound to cost something, for it wiU not
come by itself, nor will it go out again by itself when
once it has got there.

One of the questions, then, that we ask about any
proposed tax is whether it is Ukely to be expensive
to collect, and, other things being equal, we prefer
those which do not cost much to collect. Another
question is how the tax can be paid with the least
possible inconvenience to the payer. No one Hkes
pa5dng taxes, but some ways are less tiresome than
others. And the taxpayer should know how much
he has to pay. Nothing is less hkely to encourage
production than any uncertainty as to how much of
what one produces is going to be demanded by the
state. Taxes, then, should be, as Adam Smith

PUBLIC FINANCE 191

pointed out, as far as possible certain, cheap, and
convenient.

That is comparatively easy. But when we get to
the other condition laid down by Adam Smith, we
are at once in difficulties. Taxes, he said, should be
imposed in such a manner as to involve equal sacrifice
upon the part of the payers. This is hard to manage.
If we took the same amount, or even the same pro-
portion of his income, from every one, we should
be very far from having imposed equal burdens.
Some people might starve if an eighth of their
income were removed, some might be reduced below
efficiency level, some might have to cut down their
comforts, and the very rich would hardly feel it.
Another trouble is that some people benefit much
more than others from the work for which the taxes
pay, so that they get more though they might possibly
pay less. For instance, we could argue that the rich
benefit most from the work of the poUce, because
they have most to guard. On the other hand, public
expenditure on wash-houses benefits only those who
use the wash-houses.

It seems impossible to find any one tax which can
be raised in such a way as to place an equal burden
upon every one, and the best that can be done is so
to arrange the whole system of taxation as to distri-
bute the burden as fairly as possible between all the
different taxpayers.

DIRECT AND INDIRECT TAXATION

This brings us to a consideration of the different
kinds of taxes. They are usually classified under two

192 GETTING AND SPENDING

headings, direct and indirect, and though this is now
supposed to be unscientific, it is convenient. Direct
taxes are those which are paid by the people upon
whom the burden of the tax falls. When any one pays
7s. 6d. for a dog hcence, for example, that 7s. 6d. has
to come out of his or her pocket, and cannot be
recovered from any one else. An Indirect tax, on the
other hand, is paid by one person, who does succeed
in getting it from some one else.

The merchant who imports tea from India or China
has to pay to the customs ofl&cer at the docks a tax
of so much on each pound of tea. But he has not the
remotest intention of bearing that burden himself.
He adds it on to the price he charges for his tea, and
it is probably paid, as a rule, by all the people who
buy the tea. If the tax is diminished, the price of
tea will probably faU, if it is increased, up goes the
price of tea. All this has been brought home to us
only too vividly by the war taxes upon such things
as tea, tobacco, and alcohol.

It is worth while perhaps to note here that an
indirect tax, that is a tax paid by some one who
imports the taxed commodity, may be levied either
because the government wants money, that is for
revenue purposes, or because it wishes to keep the
commodity out of the country, that is for protective
purposes. If the tax is efficient in one way, it cannot
possibly succeed in the other. If it brings in revenue,
it does not keep the commodity out, if it keeps it
out, it does not bring in revenue. It may do both
badly, but it cannot do both well.

When we are trying to find out what really will be
the result of a tax upon a commodity, what we must

PUBLIC FINANCE 193

consider is who uses that commodity, and how much
they want it. If the demand is very elastic, and if
something else can be substituted, the tax may bring
in very little revenue. If, on the other hand, the
article taxed is one for which the demand is inelastic,
a thing which people will have and will be willing to
pay more for rather than go without, then revenue
wiU be obtained, if the commodity is one which many
people need.

In theory it is very desirable to tax luxuries, because
a tax upon luxury cannot diminish efficiency. But
in practice it is seldom worth while to tax the luxuries
that are only used by the few, because they bring in
so little revenue. Every one wants to tax the rich,
but when there are not many of them a tax on their
particular luxuries is not much use. So that it is
usual to place taxes upon those luxuries, such as
tobacco and alcohol, or tea, which are used by every
one. Such taxes are convenient, because they are
included in the price of the commodity, and are paid
for when it is paid for, but they are not as a rule cheap,
because indirect taxation means a considerable number
of customs officers and a good deal of expense.

As indirect taxation, if it is to be productive, must
be imposed upon things which are used by every one,
a little thought will show that it does not place an
equal share of the burden upon every one. A poor
woman spends a larger proportion of her income upon
tea than does one who is better off, while the rich woman
may spend actually more, because she buys a more
expensive sort of tea, but much less in proportion to
her whole income, than either of the others. So that
a tax on tea means a heavier burden upon the poorer
c.s. N

194 GETTING AND SPENDING

woman than upon the richer, and the richer the person
the lighter is the burden. If all taxes were indirect,
then, an undue share of the burden would be laid
upon the poorer classes of the community.

This brings us at once to direct taxes. Direct taxes
are cheap, but they cannot be said to be convenient.
No one hkes having to pay lump stuns, and many
people who are accustomed to be paid weekly, and
to pay weekly, find it extremely difficult to put aside
enough to meet quarterly or yearly demands upon
them for taxes or rates. On the other hand, if they
know they are paying taxes — or rates — they are more
Ukely to give thought to the question of whether
they are getting their money's worth out of those
taxes, while if they pay, without knowing it, in the
price of the taxed article, they may not stop to think
about this important question, and governments may
get into extravagant habits. It was a statesman with
a passion for public economy who said that the tax
collector was the best schoolmaster.

One difficulty, however, there is about this side of
taxation, and that is that as it is in practice found
very difficult to extract a direct tax from people who
are paid weekly, except small taxes Uke dog Hcences,
we have a large niunber of people who have votes and
determine pohcy, benefiting from the taxes perhaps,
and not pa5dng them, but placing them upon other
people. This is not hkely to lead to economy.

Our system of taxation includes both indirect
taxes, which are mostly imposed upon things used by
almost every one, and therefore fall more heavily
upon poorer people than upon richer, and two great
direct taxes, income-tax and death duties. There are

PUBLIC FINANCE 195

also what are known as stamp duties : that is, people
have to place a stamp of a certain value upon various
legal and other documents. Looked at all together,
the burden of these taxes seems to be fairly evenly
spread, though each one of them taken alone bears
heavily upon one particular set of people.

THE INCOME-TAX

Let us think for a little about the Income-Tax. It
is clearly unwise to remove any part of the income of
a person who has only just enough to keep himself
eflftcient. But how can we decide how much that is?
It will vary according to the place in which he Uves,
the number of people dependent upon him, and the
sort of work he does. A writer or inventor who works
at home must have a room to himself, and that room
must be quiet. Cheerful sounds from nursery or kitchen
are not good for concentrated thought. This means
a large house, and that means pas^ments for help in
keeping it clean and in repair. On the other hand, a
man who does his work away from home welcomes
company when he gets back. He can do with a much
smaller house.

The tax system cannot take quite all this into con-
sideration, but we do begin by letting off aH whose
incomes fall below a certain amount. It is a rough
and ready way of providing against the taxation of
what is necessary for the efficiency of the average person.
Secondly, allowances are made for children of school
age, and that is satisfactory. It is easy to see that a
man with half a dozen young children is not at all in

196 GETTING AND SPENDING

the same position as another man with one, or none,
even if he has the same income. Allowances are now
made too for other dependents such as a helpless sister
or mother, so that we are getting on.

Then when we think about it, we see that 2S. 6d.
in the pound does not represent the same sacrifice to a
man with an income of £1000 as it does to a man with
an income of £500. It may only mean doing without
luxuries to the first, but it may mean going short of
comforts or even necessaries to the second. So the
income-tax is graduated up to a certain point, and
people with incomes of different amounts pay at
different rates. It is not very tidily done, Uke so
many English arrangements it has been done in bits,
here a Httle improvement and here another, and it is
not perfect by any means, but it is better than it was
when the same number of shiUings in the pomid had
to be paid by every one whatever their income.

Again, we see that a man who earns his income is
not, in fact, as rich as the man who has an income
of the same amount from investments, though the
actual amount each gets in a year may be the same.
But the man who earns has to provide for illness, for
being out of work, for old age, and for his children,
while the other need do none of these things. So that
here again improvements have been made, and people
pay at a lower rate upon earned incomes than they
do upon incomes which come from investments,
although this relief is denied to those who have more
than a certain amount.

The Death Duties are paid when one person dies,
leaving property behind, and before the successor
takes possession, so that we might, if we wished, say

PUBLIC FINANCE 197

that no one paid them, but that the State takes a
share out of the property before allowing it to be
passed on. These, too, are graduated, and the amount
partly depends upon the relationship of the person
who dies to the person who inherits. They bring
in a very considerable revenue, and as they
fall more heavily on the very rich than upon those
who are only moderately well off, they help to keep
the balance even. For the only moderately well off
are more heavily burdened by the income-tax and the
indirect taxes than are the very rich.

A very high level of taxation, such as we endure after
an expensive war, must mean that saving is checked
to some extent, and that many people are very much
inconvenienced. The Chancellor of the Exchequer,
whose business it is to decide about these things, has
always to remember that if a tax is too high it will not
work. If a tax makes a commodity very expensive,
people will do without it, if they possibly can, and the
result of that is that httle or no revenue is obtained.
So that a low tax upon some commodity which every
one uses is much more pi-oductive than a tax which is
high enough to check the use of the taxed commodity.
From the point of view of economy in collection, too,
it is far better to tax only a few things than to tax
many.

One of the reasons why Chancellors of the
Exchequer want so much from the taxpayers is that
over and over again they have been unable to make
two ends meet, and have been obliged to borrow.
The National Debt is the result of these borrowings.
Every year a large number of millions has to come
out of the pockets of all the taxpayers, and be paid

igS GETTING AND SPENDING

back again into the pockets of those or their heirs
who were able to lend to the government in its need.
They get interest upon their loans. Every govern-
ment tries, some with success and some without, some
with energy and some in a luke-warm manner, to get
part of this debt paid off, and the sums put aside for
the service of the National Debt allow not only for
interest but for gradual repayment.

If all went well, the debt would slowly but steadily
diminish. Unluckily all does not go well, and the
efforts of many years are undone by one year of such
a war as that which is just over. The history of the
National Debt is the history of our wars. In war years
it piles up, in peace years we try to pay it off. However,
we can comfort ourselves by thinking that in so far
as the National Debt is owed to ourselves (but a
good deal of it is owed to others) it is only taken out
of one pocket and put into another. This process,
however, must cost something, so that what is taken
out in taxes is boimd to be more than what is put in
as interest.

RATES

The principle upon which rates are levied is that
the value of the house in which a person Uves is a good
rough working test of what he can afford to pay in
rates. It is not by any means perfect, for obviously
there may well be a poor man with a large family
living in a big house, and a rich widow or bachelor,
with no children, hving in a small one. Still, perfection
is hard to get, and it is not a bad standard. Most
people live in houses which bear some relation to their

PUBLIC FINANCE 199

incomes. Broadly speaking, a house or shop or
factory is rated at its supposed rental, after an allow-
ance is made for repairs and insurance, and when the
authorities of a town know from their rate book how
much all these rentals come to, a simple process in
arithmetic tells them how many pennies or shillings
in the pound they must take from the ratepayers to
provide them with what they need to carry on their
part of the work of government.

There are certain difficulties; for instance a place
with a very large number of small houses will only
have a low 'rateable value,' but it will probably cost
as much, perhaps even more, to run, as a place with
large shops or other buildings which have a high
rateable value. The unlucky people who live in the
small-house locality wiU probably therefore have to
pay a good many shillings in the pound. They are
not unnaturally inchned to ask for help either from the
taxpayer or from richer districts. It is easy to see
that there are more taxpayers than ratepayers, because
only the occupier, that is, the householder, in each
house has to pay the rates, but there might quite
easily be several taxpayers aU living in the same house,
to say nothing of wanderers in lodgings and hotels
who drink tea, smoke tobacco, and consume alcohol,
all operations which bring in a good deal to the tax-
gatherer.

People who pay taxes and rates are anxious to shift
them on to the shoulders of other people, if possible.
How far they are able to get rid of their burdens will
depend, as we should expect, upon the conditions of
demand for and the supply of the thing that is taxed.
Suppose there is a considerable rise in the rates, rent

200 GETTING AND SPENDING

and rates together come to more than the occupier
of a certain house thinks he can afford. What will he
do ? If there are empty houses in the neighbourhood,
that is if the supply of houses is in excess of the
demand, he may be able to get his rent lowered. He
will tell the house owner that unless the rent is lowered
he wiU have to move.

But the house owner is probably only getting enough
out of the rent to pay the interest on the cost of putting
up the house, as well as repairs, insurance, and a
reasonable return for his own work in house managing.
He cannot bear the new charge. He will try to shift
it back on to the land-owner, and how far he succeeds
depends upon the sort of lease he has. But next time
he wants a plot of land for building purposes he will
take into consideration the amount of the new rates,
and knowing about how much in rent and rates
together the kind of tenant he has in mind can afford
to pay, he wiU probably offer a lower rent for the
land on which he means to build than he would have
offered had the rates been lower.

If the demand for houses is in excess of the supply,
a state of things with which we are all too famihar
nowadays, the occupier will not even try to get his
rent lowered, he will know that there are people waiting
who wiU take his house if he leaves. He will perhaps
take in a lodger, or do without a hoUday or some other
comfort. For the time being the burden remains
upon him.

The same sort of reasoning applies in the case of a
tax upon some articles, say sugar. The importer
pays the tax, and at once passes it on to the grocer.
He cannot afford to bear it, he is only making the

PUBLIC FINANCE 201

average rate of profit without which he would not go
on working, so he passes it on once more and raises
the price of sugar to all of us. What shall we do?
Some of us, who have perhaps been a little extravagant,
will buy less sugar. Others, who have only bought
just as much as they must have and no more, will
have to pay the new price. But they will have to do
without something else, very Hkely something Uke
jam or sweets, which have also become dearer owing
to the new price of sugar. All this means less demand
for sugar. Less is bought by the grocer and the people
who make jam or chocolate, less is therefore ordered
by the importer. Less, thus, can be sold by the growers
in India or Jamaica or the other sugar-growing places,
or if they grow the same amount they must find new
markets.

If the markets they have hitherto had have been
the most profitable, it looks as if some part of the
burden of the sugar tax will be borne by them, but
most by the sugar users, who need sugar and have
to go on buying a good deal of it even if it is dearer. In
so far as they do without something else, the result of
the sugar tax will be to hit the producers of that
something else, and we can even go on and say that
if less sugar is imported, less of something, which
used to be exported to pay for the sugar, will be sold,
so that the sugar tax will hit a quite unexpected set
of people who produced perhaps cotton or brass ware
and exported it in return for sugar.

If the taxed commodity is one, unlike sugar, which
people can do without, the result may be a falling off
in the demand for the taxed article, and perhaps an
increase in the demand for some other, which can be

202 GETTING AND SPENDING

used as a substitute. Here again there will be a dis-
turbance of the markets, and the effects of the tax
may spread into unexpected places. It is clear that
the Chancellor of the Exchequer and his advisers
will have to do a great deal of careful thinking before
they impose any fresh tax upon us. It is also probable
that less disturbance wiU result from slight changes
in an old tax than from the imposition of a wholly
new one.

If any one is inclined to doubt the value of economic
teaching, or to think the subject unreal, not connected
with the facts of everyday Hfe, that doubter should
study the history of English finance. Our system of
taxation is not perfect, but it has stood some very hard
tests, it has brought in an enormous revenue, which
costs comparatively little to collect, and which in
ordinary times imposes a burden that can easily be
borne by the taxpayers. Just now, of course we are
all suffering under the results of the greatest and most
expensive of wars, and our burdens are undoubtedly
heavy. But even so, the burdens that we have borne,
the results of our methods as compared with those
of other countries may well be taken as a triumph for
British finance.

And our financial system is what it is, and as good
as it is, largely because of the work and influence of
the great British economists. Adam Smith, Ricardo,
J. S. Mill, aU have left their mark upon it, and in
our own day those who have devoted themselves to
the study of economic problems are constantly called
in to advise the men who manage our finances. On
Royal Commissions, special committees, and in close
relations with the work of the Treasury, the economists

PUBLIC FINANCE 203

are at work. Like others, they are liable to make
mistakes, but all of us ordinary people, who grumble
at our income-tax or the price of tea or tobacco,
owe a very great deal more than most of us
suspect to the work of economists and to economic
thought.

BIBLIOGRAPHY

Text-books

Outlines of Political Economy : S. J. Chapman; (Long-
mans).

Introduction to Economics : Seager; (Holt and Co.).

Principles of Political Economy : J. S. Nicholson; 3
vols. (Black).

Advanced Text-books

Principles of Economics : Pierson; 2 vols. (Macmillan).
Principles of Economics : Marshall; (Macmillan).

Classics

Principles of Political Economy : J. S. Mill; Edited

by W. J. Ashley (Longmans).
The Wealth of Nations : Adam Smith; Edited by E.

Cannan (Methuen).

Essays and Studies

Economics of Industry : Marshall; (Macmillan).

Economic Studies : Bagehot; (Longmans)

Studies in Economics, The Distribution of Income,

Second Thoughts of an Economist : W. Smart;

(MacmiUan).

Production and Distribution : Cannan; (Rivington).

204

BIBLIOGRAPHY 205

Wealth and Welfare : Pigou; (Macmillan).

Poverty and Waste : Hartley Withers; (Smith, Elder).

Special Subjects
distribution

The Co-operative Movement To-day : Holyoake; (Social
Questions Series, Methuen).

Industrial Co-operation: C. Webb; (Co-operative Union,
Manchester).

Co-operative Production: Jones; (Clarendon Press).

Methods of Industrial Remuneration: Schloss; (Williams
and Norgate).

Trade Unionism New and Old : Howells; (Social Ques-
tions Series, Methuen).

Industrial Democracy : S. and B. Webb; (Longmans).

The Adjustment of Wages : Ashley; (Longmans).

The Payment of Wages, The World of Labour, Self-
Government in Industry : G. H. Cole; (Bell).

CLASSIC

Capital : Karl Marx.

Exchange

Money: Jevons; (Kegan, Paul Trench and Co.).

Money : Walker; (MacmiUan).

The Meaning of Money, Money Changing: Hartley

Withers; (Smith, Elder).
International Trade : Bastable; (Macmillan).
A. B.C. of the Foreign Exchanges: Clare; (Macmillan).
Lombard Street : Bagehot; (Kegan, Paul Trench and

Co.).
TheTheory and History of Banking : Dunbar; (Putnam.)

2o6 BIBLIOGRAPHY

Taxation

Principles and Methods of Taxation: Armitage Smith;

(Murray).
Public Finance : Bastable; (Macmillan).
The System of National Finance : Hilton Young (Smith;

Elder).
The History of Local Rates in England: Cannan; (P. S,

King).
Our Money and the State, War-Time Financial Problems:

Hartley Withers; (Smith, Elder).

GLASGOW : W. COLLINS SONS AND CO. LTD.

Some New Publications

from MESSRS COLLINS' LIST

Published from their London Offices, 48 PALL MALL, S.W.

Note. — ^Messrs Collins will always be pleased
to send lists of their forthcoming books to any
one who will send name and address.

Old England BERNARD GILBERT

Royal 8vo, Cloth, 20/- net

A God's-Eye view of a village. This book is unique in EngUsh
literature both in conception and treatment. The author presents a
whole community to the reader, taking for his subject our largest social
unit — an English village — where everybody knows everything about
every one. He has taken a typical village during one day of the war
and given a camera obscura presentment of the multitudinous intrigues,
ambitions, desires, disputes, relationships, and interests which thread
its fabric so closely. There is no hero or heroine, for the author
presents some hundreds of characters, each all important to himself.
These speak their own thoughts, throw startling sideUghts on their
neighbours; and from the whole, a picture of a village community
takes definite shape. The author has snapped his village at one instant
on one day, so that there is no "action.' The village is frozen motion-
less whilst the reader inspects each inhabitant. There is no senti-
mentaHsm, no 'kailyard' gloss; the villagers expressing tiiemselves
with immense force from the Earl to the mole-catcher. Mr Gilbert
has done intensely for the English countryside what Balzac did for
his nation on a great scale. Not only is each of the great array of
characters set forth vividly, but the larger problems of the country-
side are illuminated from various angles. A map of the village shows
every cottage, some fifty genealogical trees explain the relationships
of the villagers, and a 'Who's Who' gives full information about each
inhabitant. The author has taken three years to write this book, and
it is the fruit of a life-time's close observation. All who were bom in
the country or have any interest in rural life and problems must be
interested in Oli England.

The Carpenter and His Kingdom

Dr ALEXANDER IRVINE

CrovTO 8vo, Cloth, 7/6 net

Dr Irvine has already secured a very high place in the afifections
of the people of this country through his books, My Lady of the Chimney
Corner and The Souls of Poor Folk. The Carpenter and His Kingdom,
as the name denotes, is a Life of Christ, a re-interpretation of His
life as seen by a very simple yet very subtle, very human yet very
wise ideaUst and Christian. No writer on social tendencies after the
war has failed to point out the great loss of prestige suffered by the
Churches. Speaking broadly, they are regarded with a disinterested
tolerance almost amounting to contempt by the great majority of
people, and this attitude has as its general effect a marked decrease
in 'belief in Christianity. Dr Irvine's book may prove a very real
antidote to that progressive agnosticism, for he still believes that the
Life of Christ is the greatest example mankind has ever been given,
and that the influence of His message is vastly greater than that of
any other single influence in history. But to show that he has to draw
a new picture of Christ emphasising His Humanity as well as His
Divinity, and make His teaching intelligible to a Society still hardly
approaching convalescence after a prolonged and viriUent disease.
It is an original, beautiful, and timely book.

A London Mosaic W. L. GEORGE

Small Crown 4to, Cloth 15/- net.

Illustrations by P. Forbes-Robertson

A series of brilUant satirical sketches of London places and London
people by one of the most popular novehsts of the day. Mr George
is always interesting and his point of view original and challenging.
He knows London intimately and loves her well, but his affection
does not blunt his critical sense.

To go with him to the Caf§ Royal and listen as he points out and
discusses the great ones sitting therein; to follow him on his pilgrimage
'In Search of Vice'; to accompany him to theatre or music hall, are
most amusing and instructive experiences which no lover of London
should miss. Mr Philippe Forbes-Robertson's illustrations perfectly
interpret the mood of the book.

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